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SUPPLEMENT 


OLMES 

NCOME 
TAX 


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i 

THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 

SCHOOL  OF  LAW 


*n 


WITHDRAWN 

!►.  A.  CO.  L.  L 


SUPPLEMENT 

TO 

FEDERAL  INCOME  TAX 

INCLUDING   TAX   ON    UNDISTRIBUTED   NET 

INCOME,  CAPITAL  STOCK  TAX, 

WAR  EXCESS  PROEITS  TAX 

AND 

STAMP  TAX 

WITHDRAWN 

L»  A.  CO.  L.  L 

BY 

GEORGE  E.  HOLMES 

of  the   New  York  Bar 


CHICAGO 

CALLAGHAN  AND  COMPANY 
1918 


T 
»9H 

5«.pf 

Copyright  1918 

By 

GEORGE  E.  HOLMES 

PREFACE 


Since  the  publication  of  the  first  edition  of  Holmes 
[neome  Tax,  the  Treasury  Department  has  issued  a  new 
compilation  of  rulings,  known  as  Regulation  33,  Eevised. 
Several  Treasury  decisions  have  also  been  published 
amending  or  repealing  former  rulings  or  announcing  the 
construction  of  the  Treasury  Department  on  points  which 
were  unsettled  at  the  time  of  publishing  the  first  edition. 
The  recent  rulings  and  regulations  are  set  forth  in  this 
supplement,  reference  being  made  to  the  pages  in  Holmes 
Income  Tax  where  may  be  found  statements  on  the  same 
subjects. 

The  Treasury  Department  has  also  issued  a  compila- 
tion of  rulings  on  the  War  Excess  Profits  Tax,  which  are 
printed  in  full  herein,  together  with  notes  and  cross- 
re  t'erences  by  the  author. 

A  new  chapter  has  been  added,  dealing  with  the  Stamp 
Taxes. 

The  Author's  thanks  are  again  extended  to  The  Cor- 
poration Trust  Company  of  New  York  City  for  the  use 
of  its  valuable  Income  Tax  Service  and  War  Tax  Serv- 
ice in  the  preparation  of  this  new  matter.  Their  War 
Tax  Service  for  1914  and  1915  was  of  particular  value 
as  a  source  of  information  regarding  the  rulings  under 
) lie  Stamp  Tax  Law  of  October  22.  1914. 

George  E.  Holmes. 


SUPPLEMENT 

TO 

HOLMES  INCOME  TAX 


CHAPTER  1 

INTRODUCTION 

[Page  5.] 

Retroactive  Effect  of  Rulings.  Treasury  Department 
decisions  promulgating  rulings  of  the  Internal  Revenue 
Bureau  become  effective  upon  the  date  of  approval  un- 
less otherwise  stated  therein.  Cases  previously  ad- 
justed in  contravention  of  law  as  pronounced  in  such 
decisions,  are  subject  to  readjustment  in  accordance 
with  the  decision.  (Reg.  33  Rev.,  Art.  38.) 

[Page  9.] 
Record  to  be  Kept.     Every  individual,  partnership, 

corporation,  or  association  liable  to  any  tax  imposed 
under  the  internal  revenue  laws  of  the  United  States 
or  for  the  collection  thereof  shall  keep  such  records 
and  render  such  statements  and  return,  under  oath,  as 
shall  be  prescribed  by  the  Commissioner  of  Internal 
Revenue.  (Reg.  33  Rev.,  Art.  50.) 

CHAPTER  3 

INDIVIDUALS  TO  WHOM   THE  LAW  IS  APPLICABLE 

[Page  25.] 

ors.     For  income   tax   purposes   majority   is  at- 

c^.ned  at  21,  unless  the  statute  of  the  state  of  residence 
F.  I.  Tax  Supp.— l 

659 


660  HOLMES   INCOME   TAX  SUPPLEMENT 

otherwise  provides.  (Telegram  from  Treasury  Depart- 
ment dated  January  25, 1918;  I.  T.  S.,  1918,  Par.  3074.) 
The  parent  is  held  to  be  the  natural  guardian  of  a 
minor  child.  Income  received  by  the  minor  child  from 
sources  other  than  the  parent  should  be  included  by 
the  parent  in  his  return  of  income.  The  fact  that  such 
income  is  not  appropriated  by  the  parent  is  immaterial, 
as  it  will  be  held,  in  the  absence  of  a  showing  of  fact  to 
the  contrary,  that  such  income  was  subject  to  appro- 
priation and  was  appropriated  by  the  parent,  and  that 
the  child  receives  the  same  as  a  gift  from  the  parent. 
Where  the  income  is  from  a  separate  estate  and  the 
parent  has  been  appointed  guardian  and  the  conditions 
are  such  that  the  income  so  received  is  to  be  held  for 
the  use  of  the  child,  it  shall  not  be  included  in  the  re- 
turn of  income  of  the  parent,  but  shall  be  accounted  for 
otherwise  for  the  purpose  of  the  income  tax  in  manner 
and  form  as  called  for  by  the  facts  of  the  particular 
case.  (Reg.  33  Rev.,  Art.  29.) 


CHAPTER  4 

CITIZENS  AND  RESIDENTS  OP  THE  UNITED  STATES 

[Page  33.] 

Losses  Not  Incurred  in  Trade*.  The  next  to  the  last 
sentence  of  the  paragraph,  (on  page  34)  should  read  as 
follows :  ''He  is  thus  required  to  pay  a  tax  on  only  the 
net  gain  from  such  transactions  during  the  year. ' ' 

[Page  36.] 

Contributions  to  Charities.  In  connection  with  claim 
for  this  deduction  on  returns  of  income  there  shall  be 
stated : 


INCOME   TAX   RULINGS  66] 

(a)  The  name  and  address  of  each  organization  to 
which  a  gift  was  made. 

(b)  The  date  and  amount  of  the  gift  in  each  case. 

Where  the  gift  is  other  than  money,  the  basis  for  cal- 
culation of  the  value  of  the  gift  shall  be  the  fair  mar- 
ket value  of  the  property  the  subject  of  gift  at  the 
time  of  the  gift.  (Reg.  33  Rev.,  Art.  8.) 


CHAPTER  5 

NON-RESIDENT    ALIENS 

[Page  48.] 

Salaries  Paid  by  Resident  Employers.  It  is  held  that 
salaries,  wages,  commissions,  and  rents  paid  by  domes- 
tic corporations  resident  individuals,  or  partnerships 
to  non-resident  alien  employees  for  services  rendered 
entirely  in  a  foreign  country  and  for  property  located 
in  a  foreign  country  are  not  subject  to  deduction  and 
withholding  of  the  normal  tax,  and  such  payments  of 
income  will  not 'be  subject  to  the  income  tax  in  the 
hands  of  the  recipient  as  from  a  source  within  the 
United  States.  (Reg.  33  Rev.,  Art.  32.) 

[Page  50.] 

Profits  on  the  Sale  of  Property.  When  a  non-resi- 
dent alien  who  owns  stock  in  an  American  corporation 
disposes  of  same  by  sale,  the  sale  and  delivery  being 
made  within  the  United  States,  the  profit  will  be  held 
to  have  been  derived  from  sources  within  the  United 
States  and  is  to  be  included  for  the  purpose  of  income 
tax.  (Reg.  33  Rev.,  Art.  4.) 


662  HOLMES   INCOME    TAX   SUPPLEMENT 

[Page  55.] 

Return  of  Annual  Net  Income.  A  non-resident  alien 
individual  shall  make  a  full  and  accurate  return  of  all 
net  income  received  from  sources  within  the  United 
States,  regardless  of  amount  unless  the  tax  on  such  in- 
come has  been  fully  paid  at  the  source ;  and  is  not  en- 
titled to  the  benefit  of  the  several  deductions  and  cred- 
its provided  by  section  6  of  the  act  of  September  8, 
1916,  as  amended  by  the  act  of  October  3,  1917,  unless 
such  return  is  filed  by  him  or  his  authorized  agent. 
(Reg.  33  Rev.,  Art.  32.) 

[Page  55,  Note  43.] 

When  all  income  tax  to  which  income  of  a  non-resi- 
dent alien  is  subject  is  not  withheld  at  the  source,  a 
return  of  income  will  be  required  to  be  filed  by  or  on 
behalf  of  said  non-resident  alien,  and  penalty  for  fail- 
ure to  make  return  in  time  will  attach.  All  property  in 
the  United  States  of  a  non-resident  alien  will  be  sub- 
ject to  distraint  for  collection  of  tax  and  penalty.  (Reg. 
33  Rev.,  Art.  13.) 

[Page  58.] 

Abatement  and  Refund.  Where,  upon  filing  return 
of  income,  it  appears  that  a  non-resident  alien  is  not 
liable  for  income  tax,  but,  nevertheless,  income  tax 
shall  have  been  withheld  at  the  source,  in  order  to  ob- 
tain a  refund  on  the  basis  of  the  showing  made  by  the 
return  there  shall  be  attached  to  the  return  a  statement 
showing  accurately  the  amounts  of  tax  withheld,  with 
the  names  and  post  offices  addresses  of  all  withholding 
agents.  (Reg.  33  Rev.,  Art.  32.) 


INCOME    l  US    RULINGS  663 

CHAPTER  6 

RESIDENT  AGENTS  FOR  NON-RESIDENT  ALIENS,  FOREIGN  COR- 
PORATIONS   AND    FOREIGN    PARTNERSHIPS 

[Page  62.] 

Duties  and  Liabilities  of  Resident  Agents.     The  re 
sponsible  heads  or  representatives  of  non-resident  aliens 
in  connection  with  any  sources  which  said  aon-residen1 

aliens  may  have  within  the  United  Stales,  shall  make  a 
full  and  complete  return  of  such  income  and  shall  pay 
any  and  all  lax,  norma]  and  additional,  assessed  upon 
the  income  received  by  them  in  behalf  of  their  non- 
resident alien  principals,  in  all  eases  where  the  income 
tax  on  income  so  in  their  receipt,  custody,  or  control 
shall  not  have  been  withheld  at  the  source. 

Where  non-residen1  aliens  have  various  sources  of 
income  within  the  United  States  so  that  at  any  one 
source  or  from  all  sources  combined,  the  amount  of  in- 
come shall  call  for  the  assessment  of  additional  tax  and 
a  return  of  income  shall  not  be  filed  by  or  on  behalf  of 
a  non-resident  alien  for  the  purpose  of  the  assessment 
of  income  tax,  the  Commissioner  of  Internal  Revenue 
will  cause  a  return  id'  income  to  be  made  and  include 
therein  the  income  of  the  non-resident  alien  from  all 
sources  concerning  which  he  has  information  and  shall 
assess  the  tax  and  colled  the  same  from  one  or  more 
or  all  of  the  sources  of  income  wit  hin  1  he  I  idled  States 
of  said  non-resident  alien,  without  allowance  for  deduc- 
tions and  credits  under  section  ti.  (Reg.  .'{.'3  Rev.,  Art. 
32.) 

[Page  63.] 

Making  Returns  for  Non-Resident  Principal.     Tin 
agent  of  a  non-resident  alien  is  responsible  for  a  correct 


664  HOLMES   INCOME   TAX   SUPPLEMENT 

return  of  all  income  accruing  to  his  principal  within  the 
purview  of  the  agency,  and  the  agent  will  be  held  re- 
sponsible for  a  complete  return  of  all  such  income.  The 
agency  appointment  will  determine  how  completely  the 
agent  is  substituted  for  the  principal  for  income  tax 
purposes.  (Reg.  33  Rev.,  Art.  32.) 

[Page  64.] 

Paying  the  Tax  for  Non-Resident  Principal.  Income 
derived  by  non-resident  aliens  from  sources  in  the 
United  States  is  subject  to  the  normal  or  additional 
tax,  or  both,  as  the  case  may  be,  and  said  tax  shall  be 
paid  by  the  owner  of  said  income,  or  the  proper  repre- 
sentative of  the  non-resident  alien  having  the  receipt, 
custody,  control,  or  disposal  of  the  same.  In  all  cases 
the  proper  representative  in  the  United  States  of  a 
non-resident  alien,  with  respect  to  such  income,  shall 
make  return  for  such  non-resident  of  all  such  income 
coming  into  his  custody  or  control  and  pay  the  tax 
thereon  as  provided  by  law ;  provided,  however,  where 
all  income  shall  have  been  paid  over  by  the  representa- 
tive to  his  principal  on  or  before  October  3,  1917,  under 
the  law  and  income  tax  regulations  in  force  up  to  that 
date,  or  where  the  stockholder  or  record  shall  not — 
between  October  3  and  December  31,  1917, — be  in  re- 
ceipt of  or  have  in  his  custody  or  control  income  the 
property  of  his  said  principal,  such  representative  will 
be  relieved  from  paying  said  tax,  leaving  the  same  a 
charge  against  the  non-resident  alien  and  to  be  col- 
lected from  him  by  any  means  at  the  disposal  of  the 
Commissioner  of  Internal  Revenue;  but  where  such 
representative  shall  have  in  his  possession,  custody,  or 
control  subsequent  to  October  3,  1917,  income  of  such 
non-resident  alien,  said  representative  shall  pay  the 


INCOME   TAX   RULINGS  665 

total  tax  due  upon  the  income  of  such  non-resident 
alien  so  in  his  custody  and  control  for  the  entire  year 
1917  and  subsequent  years.  (Keg.  33  Rev.,  Art.  32. ) 

CHAPTER  7 

NOMINAL,    STOCKHOLDERS 

[Page  68.] 

Procedure  When  Actual  Owner  Is  Non-Resident.  In 
all  cases  where  the  actual  owner  is  a  non-resident  alien, 
individual  or  corporation,  and  the  record  owner  is  an 
individual,  firm,  or  corporation  in  the  United  States  (a 
citizen  or  resident  alien),  and  the  aforesaid  showing  of 
actual  ownership  is  made,  the  record  owner  will  be  held, 
for  income-tax  purposes,  to  have  the  receipt,  custody, 
control,  and  disposal  of  the  dividend  income  and  will 
be  required  to  make  return  for  the  actual  owner  and 
pay  the  tax  found  by  such  return  to  be  due.  AVhere 
the  actual  owner  is  a  non-resident  alien  corporation, 
return  will  be  made  regardless  of  the  amount  of  divi- 
dend and  the  normal  income  tax  will  be  paid,  and  when 
the  actual  owner  is  a  non-resident  alien  individual,  a 
return  shall  be  made  regardless  of  the  amount  of  the 
income,  and  when  the  net  amount  of  such  income  ex- 
ceeds $5,000  said  custodian  shall  also  pay  the  additional 
tax  on  such  income.  When  it  shall  appear  from  the 
disclosure  herein  provided  for  that  the  actual  owner 
is  a  non-resident  alien  partnership,  all  certificates  mak- 
ing such  disclosure  shall  be  transferred  to  the  Commis- 
sioner of  Internal  Revenue  for  the  information  of  the 
collector  of  internal  revenue,  but  no  return  will  be 
made  for  such  partnership  and  no  amount  will  be  re- 
tained from  such  income  by  the  representative  of  such 
partnership  in  the  United  States  unless  and  until  such 


t»t)(j  HOLMES    [NCOME    TAX   SUPPLEMENT 

representative  shall  be  so  instructed  by  the  Commis- 
sioner of  Internal  Revenue.  (Reg.  33  Rev.,  Art.  32.) 

In  all  eases  where  the  actual  owner  of  stock  is  a  non- 
resident alien  corporation  and  the  record  owner  is  an 
individual,  firm,  or  corporation  in  the  United  States, 
citizen,  or  resident  alien,  and  the  actual  ownership  lias 
been  disclosed,  the  record  owner  will  be  held  for  in- 
come tax  purposes  to  have  the  receipt,  custody,  control, 
and  disposal  of  the  dividend  and  will  be  required  to 
make  return  for  the  actual  owner  and  pay  the  tax  found 
by  such  return  to  be  due.  (Reg.  33  Rev.,  Art.  201.) 

The  record  owner  is  held  to  be  "the  proper  repre- 
sentative having  the  receipt,  custody,  control,  or  dis- 
posal" of  income  of  the  actual  owner  and  is  required 
to  file  a  return  for  or  on  behalf  of  the  actual  owner  for 
the  purpose  of  assessment  of  income  tax  not  withheld 
at  the  source. 

When  a  return  is  not  required  to  be  filed  by  or  on 
behalf  of  the  actual  owner,  the  showing  may  be  made 
upon  the  certification  of  the  record  owner. 

Upon  the  showing  thus  made,  either  by  certification 
or  return,  as  the  circumstances  may  require,  the  Com- 
missioner of  Internal  Revenue  will  make  such  assess- 
ments and  issue  such  instructions  to  debtors  and  with- 
holding agents  as  will  insure  the  proper  collection  of 
tax  in  accordance  with  the  respective  tax  liabilities. 
(Reg.  33  Rev.,  Art.  32.) 

[Page  69.] 

Procedure  When  Nominal  Stockholder  Is  a  Non-Resi- 
dent Alien.  When  the  record  owner  of  such  stock  is  a 
non-resident  alien  corporation,  etc.,  not  having  an  office 
or  place  of  business  in  the  United  States,  the  debtor 
corporation  will  withhold  the  normal  income  tax  and 


[NCOME   TAX    i;i  UNI  667 

pay  the  same  to  the  proper  officer  of  the  United  states 
authorized  to  receive  it  in  manner  and  form  provided 
for  withholding  and  accounting  for  tax  withheld. 

When  a  non-resident  alien  record  owner  of  stock  of 
domestic  or  resident  corporations  is  an  organization 
subject  to  withholding  a1  the  source  of  dividend  pay- 
ments, hut  is  nut  the  actual  owner  of  the  stock,  such 
record  owner  may  make  disclosure,  in  form  prescribed 
by  the  Commissioner  of  Interna]  Revenue,  of  actual 
ownership,  in  which  case  said  domestic  or  resident  cor- 
porations will  be  governed  by  the  established  facts. 

If  the  record  owner  does  not  exercise  his  right  to  dis- 
close actual  ownership  for  the  purpose  of  claiming  ex- 
emption from  having  tax  withheld  at  the  source,  debtor 
corporations  and  their  withholding  agents  in  the  I'nited 
States  will  be  held  liable  on  their  stock  records  of 
ownership  for  the  tax  required  to  be  withheld  by  sec- 
tion 13  (f)  of  the  act  of  September  8,  1916. 

In  the  absence  of  disclosure  of  actual  ownership  filed 
with  debtor  corporations  or  their  withholding  agents, 
in  manner  and  form  provided  for,  the  normal  tax  re- 
quired to  be  withheld  in  accordance  with  stock  records 
of  ownership  can  only  be  released  to  a  record  owner 
not  liable  for  tax  upon  a  proper  showing  to  the  Com- 
missioner of  Internal  Revenue  of  record  and  actual 
ownership,  the  names  and  post  office  addresses  of  debtor 
corporations  and  withholding  agents,  and  the  amounts 
withheld.  (Reg.  33  Rev.,  Art.  32. 

CHAPTER  8 

FIDUCIARIES 

[Page  74.] 

Who  Are  Fiduciaries.  "Fiduciary"  is  a  term  which 
applies  to  all  persons  or  corporations  thai  occupy  posi 


668  HOLMES    INCOME   TAX   SUPPLEMENT 

tions  of  peculiar  confidence  toward  others,  such  as 
trustees,  executors,  or  administrators ;  and  the  fiduciary 
for  income  tax  purposes  is  any  person  or  corporation 
that  holds  in  trust  an  estate  of  another  person.  (Reg. 
33  Rev.,  Art.  29.) 

[Page  77.] 

Duties  of  Executors  and  Administrators.  If  the  net 
income  of  a  decedent  from  January  1  to  the  date  of 
his  death  within  that  year  was  $1,000  or  over,  if  unmar- 
ried, or  $2,000  or  over  if  married,  a  return  for  such 
decedent  must  be  made  by  the  executor  or  administra- 
tor, and  such  executor  or  administrator  may  claim  all 
deductions  and  exemptions  to  which  the  decedent 
would  have  been  entitled  under  the  law.  (Reg.  33  Rev., 
Art.  4.) 

Liability  for  payment  of  income  tax  attaches  to  the 
person  of  an  executor  or  administrator  for  income  tax 
up  to  and  including  the  date  of  his  discharge,  regard- 
less of  the  fact  that  the  time  in  which  claim  is  made 
and  filed  against  the  estate  has  expired  or  where,  prior 
to  distribution  and  discharge,  the  executor  or  adminis- 
trator had  notice  of  his  obligations  to  the  Federal  Gov- 
ernment or  where  he  failed  to  exercise  due  diligence 
in  determining  whether  or  not  such  obligations  existed. 

Liability  for  the  tax  due  from  a  deceased  person,  or 
from  his  estate,  also  attaches  to  the  estate  itself,  and 
when  by  reason  of  distribution  of  the  estate  and  dis- 
charge of  the  executor  or  administrator  it  shall  appear 
that  cpllection  of  the  tax  cannot  be  made  from  the 
executor  or  administrator,  the  collector  will  make  de- 
mand on  the  distributees  for  their  proportionate  share 
of  the  tax  due  and  unpaid.  (Reg.  33  Rev.,  Art.  29.) 


INCOME    TAX    RULINGS  669 

[Page  78.] 

Receiver.  Receivers  who,  as  officers  of  a  court,  stand 
in  the  stead  of  some  principal  are  required  to  account 
for  income  tax  as  the  principal  would  have  been  re- 
quired to  account.  (Reg.  33  Rev.,  Art.  26.) 

[Page  79.] 

Trust  Estates.  A  deed  of  trust  must  be  absolute  so 
far  as  the  conveyance  of  title  is  concerned  and  irrevo- 
cable by  the  donor,  otherwise  the  income  from  the  prop- 
erty in  question  will  accrue  to  the  donor  and  must  be 
accounted  for  by  him.  (Reg.  33  Rev.,  Art.  29.) 

[Page  79.] 

Income  of  Trust  Estates.  Where,  during  the  period 
of  administration,  an  executor  converts  the  estate  in  his 
possession  as  such  executor  into  money  for  the  purpose 
of  settling  the  estate  and  closing  the  administration 
and  in  which  conversion  a  profit  is  realized  which  with 
other  income  exceeds  $1,000,  a  return  of  income  should 
be  made  by  the  executor  covering  the  period  of  admin- 
istration in  which  should  be  included  all  gains,  profits 
and  income  of  the  estate  during  such  period,  and  he 
should  pay  the  tax  found  by  such  return  to  be  due. 
The  income  of  the  estate  being  thus  freed  of  income 
tax  liability  may  thereafter  be  dealt  with  without  fur- 
ther regard  to  income  tax  requirements. 

Proceeds  of  life  insurance  policies  payable  to  the 
estate  of  a  decedent,  when  received  by  an  executor  or 
administrator,  are,  in  the  amount  by  which  such  pro- 
ceeds exceed  the  premium  or  premiums  paid  by  the 
decedent,  income  of  the  estate  to  be  accounted  for  by 
the  executor  or  administrator  under  the  provisions  of 
section  2  (b),  act  of  September  8,  1916.  (Reg.  33  Rev., 
Art.  29.) 


670  HOLMES    INCOME    TAX    SUPPLEMENT 

[Page  82.] 

Depreciation.     In  the  case  of  a  trust  estate  where  the 
tonus  of  the  will  or  trust  or  the  decree  of  a  court  of 
competenl  jurisdiction  provides  for  keeping  the  corpus 
of  the  estate  intact,  and  where  physical  property  form- 
ing a  part   of  the  corpus  of  such  estate  has  suffered 
depreciation  through  its  employment  in  business  a  de- 
duction from  gross  income  for  the  purpose  of  caring 
for  this  depreciation,  where  the  deduction  is  applied 
or  held  by  the  fiduciary  for  making  good  such  deprecia- 
tion, may  be  claimed  by  the  fiduciary  in  his  return  of 
income.    Fiduciaries  should  set  forth  in  connection  with 
their   returns   the   provsions  of  law,  trust,   or  decree 
requiring  such  depreciation  deduction  where  any  ex- 
ists or  when  actual  depreciation  occurs,  the  amount 
thereof,  and  that  the  same  has  been  or  will  be  pre- 
served  and   applied   as   such.     All   amounts   paid   by 
fiduciaries  to  beneficiaries  of  trust  estates  from  the  in- 
come of  such  trust  estates,  whether  from  reserves  or 
otherwise,  are  held  to  be  distributions  of  income  and 
will  be  treated  for  income  tax  purposes  in  accordance 
with  the  provisions  of  law  and  regulations  applicable 
to  income  of  such  beneficiaries.  (Reg.  33  Rev.,  Art.  29.) 

[Page  86.] 

Income  Received  During  Settlement  of  Decedent's 
Estate.  Under  the  provisions  of  section  2  (b)  it  is  held 
that  estates  during  the  period  of  administration  have 
but  one  beneficiary,  and  that  beneficiary  is  the  estate. 
Therefore  a  return  on  Form  1040  or  1040  A,  subject  to 
all  the  deductions  and  exemption,  shall  be  made  by  the 
executor  or  administrator  for  such  beneficiary  and  the 
entire  tax  paid  thereon.  (Reg.  33  Rev.,  Art.  29.) 


INCOME   T\\    RULINGS  67] 

[Page  87.] 

Procedure  in  Reporting  Undistributed  Income. 
Where  income  under  the  provisions  of  section  2  (b), 
ad  «r  September  8,  1916,  is  accounted  lor  in  a  return 
of  income  by  the  executor,  administrator,  or  trustee, 
as  the  ease  may  be,  aud  the  tax  shall  have  been  assessed 
and  paid  under  such  return,  such  income  is  thereby 
freed  of  all  tax  liability  and  may  be  thereafter  dealt 
with  without  further  regard  to  the  provisious  of  the 
income  tax  law.    (Reg.  33  Rev.;  Art.  2!).) 

[Page  91.] 

When  a  Return  Is  Required.  Fiduciaries  are  re- 
quired to  make  returns  of  income  on  Income  Tax  Form 
1041  whenever  the  interest  of  any  beneficiary  in  the 
net  income  of  an  estate  or  trust  for  which  the  fiduciary 
acts  is  $1,000  or  over  for  an  unmarried  beneficiary, 
and  in  case  there  are  married  beneficiaries,  then  a  re- 
turn will  be  required  whenever  the  interest  of  any  such 
married  beneficiary  is  $2,000  or  over.  (Reg.  33  Rev., 
Art.  27.) 

Administrators  or  executors  may,  immediately  after 
their  discharge,  upon  final  accounting,  file  with  the 
proper  collector  of  internal  revenue  a  return  of  income 
tor  the  income  of  the  estate  for  the  calendar  year  in 
which  the  administration  was  closed,  and  should  pay 
the  tax  found  by  such  return  to  be  due  immediately 
upon  receipt  of  notice  and  demand  for  the  amount  of 
such  tax.  There  should  be  attached  to  this  return  a 
copy  of  the  certificate,  under  seal,  setting  forth  the  fad 
of  final  accounting  and  discharge  of  the  executor  or 
administrator.  The  liability  for  return  is  fixed  by  the 
law  as  of  December  31,  and  return  will  be  required  in 


672  HOLMES    INCOME   TAX   SUPPLEMENT 

accordance  with  the  provisions  of  law  existing  on  that 
date. 

An  ancillary  administrator  is  held  to  be  merely  an 
agent  of  the  domiciliary  administrator  and  should 
transmit  to  him  all  information  as  to  income  of  the 
estate  received  by  the  ancillary  administrator,  to  the 
end  that  the  original  administrator  may  make  a  return 
covering  the  entire  income  of  the  estate.  (Reg.  33  Rev., 
Art.  26.) 

[Page  95.] 

Income  to  Be  Reported  by  Beneficiary.  All  amounts 
paid  by  fiduciaries  to  beneficiaries  of  trust  estates  from 
the  income  of  such  trust  estates,  whether  from  reserves 
or  otherwise,  are  held  to  be  distributions  of  income  and 
will  be  treated  for  income  tax  purposes  in  accordance 
with  the  provisions  of  law  and  regulations  applicable 
to  income  of  such  beneficiaries.  The  beneficiary  will 
be  required  in  the  case  of  trust  estates  to  account  for 
the  actual  amounts  distributed  or  credited  to  him. 
(Reg.  33  Rev.,  Art.  29.) 


CHAPTER  10 

PARTNERSHIPS 

[Page  103.] 

Limited  Partnerships.  Limited  partnerships — that 
is,  partnerships  having  one  or  more  special  partners 
who  may  share  in  the  profits  of  the  firm  but  whose 
liability  for  the  debts  of  the  company  is  limited  to  the 
amount  of  capital  invested  by  such  special  partner  or 
partners — are  held  to  be  associations  within  the  mean- 
ing of  this  title,  and  as  such  are  required  to  make  re- 


INCOME   TAX   RULINGS  67:5 

turns  of  annual  net  income  and  pay  any  tax  thereby 
shown  to  be  due.  The  income  received  by  the  members 
out  of  the  earnings  of  such  limited  partnerships  will 
be  treated  in  their  personal  returns  in  the  same  man- 
ner as  if  it  were  dividends  on  the  stock  of  corporations 
and  will  be  subject  to  the  additional  or  surtaxes  in  the 
hands  of  the  recipient.  (Reg.  33  Rev.,  Art.  62.) 

[Page  113.] 

Fiscal  Year.  Any  partnership  may  at  its  option  des- 
ignate the  last  day  of  any  month  as  the  close  of  its 
fiscal  year.  In  each  case  where  the  partnership's  fiscal 
year  differs  from  the  calendar  year  it  shall,  not  less 
than  30  days  prior  to  March  1,  give  notice  in  writing 
to  the  collector  of  internal  revenue  of  the  district  in 
which  its  principal  place  of  business  is  located  that  the 
day  it  has  thus  designated  is  the  closing  day  of  its  fiscal 
year.    (Reg.  33  Rev.,  Art.  31.) 

[Page  115.] 

Net  Losses  of  Partnership.  Where  the  result  of  part- 
nership operation  is  a  net  loss,  the  loss  will  be  divisible 
between  the  partners  in  the  same  proportion  as  net 
income  would  have  been  divisible,  and  may  be  used  by 
the  individual  partners  in  their  returns  of  income. 
(Reg.  33  Rev.,  Art.  30.) 


CHAPTER  12 

CORPORATIONS 

[Page  126.] 

Definition.     "Corporation"    or    "corporations,"    as 
used  in  these  regulations,  shall  be  construed  to  include 


674  HOLMES   INCOME    TAX   SUPPLEMENT 

all  corporations,  joint-stock  companies  and  associa- 
tions, and  all  insurance  companies  coming  within  the 
terms  of  the  law,  as  well  as  all  business  trusts  organ- 
ized or  created  for  the  purpose  of  engaging  in  commer- 
cial or  industrial  enterprises,  the  capital  of  which  is 
evidenced  by  certificates  or  shares  of  interest  issued  or 
issuable  to  members  on  the  basis  of  which  profits  are 
distributed  or  distributable.  (Reg.  33  Rev.,  Art.  57.) 

[Page  126.] 

Joint-Stock  Companies  and  Associations.  The  term 
"joint-stock  companies"  or  "associations"  shall  in- 
clude associations,  common-law  trusts,  or  organizations 
by  whatever  name  known  which  carry  on  or  do  busi- 
ness in  an  organized  capacity,  whether  created  under 
and  pursuant  to  State  laws,  trust  agreements,  declara- 
tions of  trusts,  or  otherwise,  the  net  income  of  which, 
if  any,  is  distributed  or  distributable  among  the  mem- 
bers or  shareholders  on  the  basis  of  the  capital  stock 
which  each  holds,  or  where  there. is  no  capital  stock, 
on  the  basis  of  the  proportionate  share  or  capital  which 
each  has,  or  has  invested,  in  the  business  or  property 
of  the  organization,  all  of  which  joint-stock  companies 
or  associations  shall  in  their  organized  capacity  be  sub- 
ject to  the  tax  imposed  by  this  act,  and  shall  make  re- 
turns of  annual  net  income  accordingly.  (Reg.  33  Rev., 
Art,  58.) 

[Page  131.] 

Liability  for  Tax  After  Dissolution.  A  corporation 
which  was  dissolved  in  1917,  prior  to  passage  of  the 
Avar  revenue  act  of  October  3,  1917,  is  subject  to  tax 
unci  or  the  act  of  September  8,  1916,  as  amended,  and 
also  to  the  war  income  tax  and  the  war  excess  profits 


INCOME   TAX   RULINGS  675 

tax  imposed  by  the  acl  of  October  3,  1917  (Brady  et 
al.  v.  Anderson,  240  Fed.,  665).  A  corporation  so  situ- 
;itcd  an-  i  1 1  make  a  return  on  revised  form  1031,  covering 
the  period  in  11)17  during  which  it  was  in  business  prior 

to  its  dissoluton.  II*  it  shall  have  previously  made  a 
return  coverng  this  period  and  shall  have  paid  any 
excess  profits  tax  under  the  act  of  March  3,  1917,  it 
shall  be  entitled  to  credit  for  the  amount  of  such  tax 
so  paid  against  any  excess  profits  tax  assessable  against 
it  under  Title  II  of  the  act  of  October  3,  1917.  (Reg.  33 
Rev.,  Art.  61.) 

[Page  135.] 

Treasury  Stock.  Treasury  stock,  wherever  and 
whenever  that  term  is  used  in  connection  with  the  ac- 
eoi nits  of  the  corporation  or  for  income  tax  purposes, 
will  he  held  to  mean  stock  Avhich  had  been  previously 
issued  by  the  corporation  and  which  had  been  re- 
possessed by  it  through  purchase  or  otherwise  and  then 
carried  on  its  books  as  an  asset.  If  such  stock  is  resold 
at  a  price  in  excess  of  its  cost  upon  repossession,  such 
excess  shall  be  returned  as  income  for  the  year  in  which 
resold.  If",  for  the  purpose  of  enabling  a  corporation 
to  secure  working  capital,  or  for  any  other  purpose,  the 
stockholders  donate  or  return  to  the  corporation  to  be 
resold  by  it  certain  shares  of  stock  of  the  company  pre- 
viously issued  to  them,  the  sale  of  such  stock  will  be 
considered  a  capital  transaction,  and  the  proceeds  of 
such  sale  will  be  treated  as  capital  and  will  not  consti- 
tute income  to  the  corporation.  (Reg.  33  Rev.,  Arts.  98 
and  99.) 

[Page  136.] 

Expenses  Incurred  in  Sale  of  Capital  Stock.     Any 
and  all  expenses  incidental  to  or  connected  with  the 

F.  T.  T;ix  Supp—  2 


676  HOLMES   INCOME   TAX  SUPPLEMENT 

selling  of  the  capital  stock  (common  or  preferred)  of 
a  corporation  for  the  purpose  of  raising  capital  to  be 
by  it  invested  in  property  or  employed  in  the  business 
for  which  the  corporation  is  organized  are  not  an 
"expense  of  operation  and  maintenance"  within  the 
meaning  of  this  title,  and  such  expense  is  not  an  allow- 
able deduction  from  the  gross  income,  for  the  reason 
that  such  an  expense  is  incurred  in  a  capital  transac- 
tion; that  is,  the  raising  of  capital  to  be  invested  or 
employed  in  the  business. 

Such  expense,  like  the  discount  at  which  the  shares 
of  stock  may  be  sold,  has  the  effect  only  to  reduce  the 
available  capital  of  the  corporation  and  cannot  be  used 
to  reduce  the  income  from  operations;  that  is  to  say, 
any  expense  incident  to  the  bringing  of  capital  into  the 
company,  whether  it  be  a  new  or  a  going  concern,  can- 
not be  recouped  out  of  or  charged  against  the  operat- 
ing income.  It  is  a  capital  loss  or  expense  properly 
chargeable  against  the  proceeds  of  the  sale  of  the  stock 
And  reduces  the  capital  rather  than  the  earnings  of  the 
company.  (Reg.  33  Rev.,  Art.  145.) 

[Page  142.] 
Indebtedness  Outstanding  at  the  Close  of  the  Year. 

From  the  amount  of  indebtedness  to  be  reported  as  in- 
debtedness oustanding  at  the  close  of  the  year  must 
be  eliminated  all  indebtedness  incurred  in  the  purchase 
of  securities  the  income  from  which  is  not  subject  to 
the  income  tax.  (Reg.  33  Rev.,  Art.  182.)  Nor  shall 
such  amount. include  indebtedness  which  is  not  bearing 
interest. 

[Page  143.] 

Car  Trust  Certificates.  Equipment  or  car  trust  cer- 
tificates issued  by  or  for  railroad  companies  are  a  means 


INCOME   TAX    RULINGS  677 

by  which  such  companies  secure  cars  or  other  equip- 
ment, or  the  money  which  with  such  equipment  is  pur- 
chased. 

The  equipment  becomes  at  once  an  asset  of  the  com- 
pany and  the  trust  certificates  secured  by  such  assets 
are  obligations  of  the  railroad  companies,  similar  to 
corporate  bonds,  mortgages,  and  like  obligations.  The 
trustees  in  whose  names  legal  title  to  the  equipment 
stands,  are  not  an  association  within  the  meaning  of 
this  title,  and  are  therefore  not  a  taxable  entity,  but 
they  are,  for  the  purpose  of  this  title,  a  fiscal  agent, 
paying  off  the  obligations,  both  principal  and  interest, 
of  the  railroad  companies  with  funds  appropriated  by 
such  companies. 

The  railroad  companies  may  include  these  trust  cer- 
tificates in  the  amount  of  their  bonded  or  other  in- 
debtedness reported,  under  item  2  of  the  return  Form 
1031,  and  the  interest  paid  thereon,  with  interest  paid 
on  other  obligations  will  be  deductible,  the  aggregate 
amount  so  deducted  not  to  exceed  the  limit  fixed  by 
law.  (Reg.  33  Kev.,  Art.  188.) 

[Page  150.] 

Lessee  Corporations.  A  railroad  company  operating 
leased  or  purchased  lines  as  an  integral  part  of  its  line 
or  system,  and  keeping  no  separate  books  of  account  as 
to  such  leased  or  purchased  line,  and  the  income  from 
the  operating  of  which  cannot  be  segregated,  shall  in- 
clude in  its  income  all  reecipts  derived  therefrom,  aud 
if  bonded  or  other  indebtedness  of  the  leased  or  pur- 
chased line  has  been  assumed  by  the  operating  com- 
pany, it  may  deduct  from  its  gross  income  the  interest 
paid  on  such  indebtedness,  provided  the  interest  so 
paid  plus  the  interest  paid  on  its  own  indebtedness  is 


678  HOLMES    INCOME    TAX   SUPPLEMENT 

not  in  excess  of  the  limit  fixed  by  the  law.  In  this  event 
the  leased  or  purchased  line  so  long  as  it  has  a  cor- 
porate existence  will  make  return  of  annual  net  income 
setting  out  that  on  its  own  account  it  has  neither  in- 
come nor  expenses,  and  that  both  are  taken  up  in  the 
return  of  the  operating  company,  naming  it.  (Reg.  33 
Rev.,  Art.  125.) 

[Page  151.] 

Lessor  Corporations.  If  the  leased  or  purchased  line 
keeps  separate  books  of  account,  or  the  income  from 
its  operations  is,  or  can  be  segregated,  or  if  the  lessee 
or  operating  company  pays  it  a  certain  rental,  or  in  lieu 
of  rental  pays  a  certain  per  cent  of  dividends  on  its 
stock,  interest  on  its  bonds,  taxes,  etc.,  it  (the  lessor) 
will  return  the  same  as  its  income  and  will  be  subject 
to  tax  accordingly,  and  the  lessee  or  operating  com- 
pany will  make  its  return  as  though  it  were  in  no  way 
related  to  the  leased  line.     (Reg.  33  Rev.,  Art.  125.) 

[Page  151.] 

Stock  Trust  Certificates.  Stock  trust  certificates  or 
leased  line  certificates,  as  the  case  may  be,  issued  by 
the  lessee  for  the  purpose  of  securing  or  holding  con- 
trol of  the  stock  of  the  lessor  are  held  to  be  issued  in 
lieu  of  the  certificates  of  capital  stock,  and  for  the  pur- 
pose of  this  tax  will  be  treated  as  capital  stock  and 
the  amounts  received  by  the  holders  of  these  certifi- 
cates are  dividends  to  the  holders,  to  be  treated  as  rent- 
als by  both  lessee  and  lessor  and  constitute  an  allow- 
able deduction  in  the  one  case  and  an  item  of  income  in 
the  other,  accordingly  as  they  are  paid  and  received. 
(Reg.  33  Rev.,  Art.  104.) 


[NCOMB  TAX   RULINGS  OTiJ 

[Page  153.] 

Fiscal  Year.     For  the  purpose  of  the  I  per  cenl  ad 
ditional  tax  imposed  by  1  lie  act  of  October  3,  1917,  it  is 

provided  that  in  the  case  of  a  corporation  making  its 
return  on  the  basis  of  its  own  fiscal  year  (other  than 
the  calendar  year)  this  tax,  for  a  fiscal  year  ending 
during  the  calendar  year  1917,  shall  be  levied,  only  on 
that  proportion  of  its  net  income  (less  dividends  re- 
ceived) which  the  period  from  January  1,  1917,  to  the 
end  of  the  fiscal  year  bears  to  the  entire  fiscal  year. 

If  the  last  previous  return  was  made  for  the  period 
ended  December  31,  1916,  and  a  return  is  made  for  a 
fiscal  period  ended  with  the  last  day  of  some  month  in 
11117,  the  tax  will  be  computed  on  the  entire  net  income 
so  returned.  (Reg.  33  Rev.,  Art.  82.) 

CHAPTER  13 

SPECIAL    PROVISIONS    APPLYING    TO    INSURANCE    COMPANIES 

[Page  166.] 

Returns  to  Conform  to  State  Reports.  Returns  of 
insurance  companies  must  be  rendered  in  conformity 
with  reports  made  for  the  same  period  to  the  State 
insurance  departments.  As  all  insurance  companies 
are  required  by  law  to  render  their  reports  to  the  vari- 
ous State  insurance  departments  for  the  calendar  year, 
their  returns  of  annual  net  income  for  the  purpose  of 
the  income  tax  should  be  made  for  the  same  period, 
unless  their  books  are  actually  kept  on  a  fiscal  year 
basis. 

Treasury  Decision  2133,  providing  that  returns  may 
be  made  on  a  basis  other  than  as  above  set  forth,  is  not 
applicable  to  insurance  companies.  (Reg.  33  Rev.,  Art. 
239.) 


680  HOLMES    INCOME   TAX   SUPPLEMENT 

[Page  166.] 

Gross  Income.  There  is  specifically  exempted  from 
taxation  interest  received  on  obligations  of  the  United 
States  or  its  possessions,  or  on  the  obligations  of  a  State 
or  any  political  subdivision  thereof.  Therefore,  in 
ascertaining  gross  income  for  the  purposes  of  the  tax, 
all  interest  received  from  such  sources  should  be  elimi- 
nated. (Report  to  State,  schedule  D,  parts  1  and  4.) 
As  accrued  interest  on  bonds  purchased  is  not  included 
in  the  interest  income  reported  to  the  State  insur- 
ance department,  it  must  not  be  included  in  the  amount 
eliminated  from  gross  income  in  the  return.  (Report 
to  State,  schedule  D,  part  3.)  In  the  case  of  obliga- 
tions of  the  United  States  issued  after  September  1, 
1917,  income  from  such  obligations  is  exempt  from  tax 
only  to  the  extent  provided  in  the  act  authorizing  their 
issue.  Income  from  such  obligations  received  by  insur- 
ance companies  is  exempt  from  the  2  per  cent  and  4  per 
cent  income  tax.  (Reg.  33  Rev.,  Art.  239.) 

[Page  174.] 

Dividends  Provisionally  Ascertained.  Dividends 
provisionally  ascertained,  apportioned,  or  credited  on 
deferred  dividend  policies  cannot  be  excluded  or  de- 
ducted from  gross  income  for  the  reason  that  the  as- 
sured has  no  vested  or  enforceable  right  in  them  and 
cannot,  at  the  time  of  the  ascertainment,  apportion- 
ment, or  credit,  nor  until  the  maturity  of  the  policy, 
avail  himself  of  such  dividends;  and  in  the  event  of 
the  death  of  the  assured  prior  to  the  expiration  of  the 
deferred  dividend  period,  the  amount  so  ascertained, 
apportioned,  or  credited  lapses.  (Reg.  33  Rev.,  Art. 
241.) 

[Page  175.] 
Copy  of  Report  to  State.    As  an  assistance  in  audit- 


INCOME    TAX    RULINGS  681 

ing  the  returns,  wherever  possible,  a  copy  of  the  report 
to  the  State  insurance  department  should  be  submitted 
with  the  returns;  otherwise  schedule  D,  parts  1,  3  and 
4,  of  the  report  should  be  attached  thereto  showing 
Federal,  State,  and  municipal  obligations  from  which 
the  interest  omitted  from  gross  income  was  derived. 
(Keg.  33  Rev.,  Art.  239.) 

[Page  175.] 

Foreign  Insurance  Companies.  Insurance  companies 
organized,  authorized,  or  existing  under  the  laws  of 
any  foreign  government  shall  report  as  gross  income 
the  gross  amount  received  within  the  year  from  all 
sources  within  the  United  States  or  its  possessions. 
Income  from  business  transacted  by  a  United  States 
branch  or  agency  of  a  foreign  insurance  company 
which  relates  to  a  foreign  country  must  be  returned 
as  gross  income.  Otherwise  articles  applicable  to  in- 
surance companies  in  general  will  be  followed  as  to 
income  and  deductions. 

Insurance  companies  organized,  authorized,  or  ex- 
isting under  the  laws  of  any  foreign  government,  not 
transacting  an  insurance  business  in  the  United  States 
or  its  possessions  but  receiving  income  from  invest- 
ments therein  must  make  returns  of  such  income,  de- 
ducting therefrom  the  amount  of  such  income  with- 
held at  the  source.  (Reg.  33  Rev.,  Art.  244.) 

CHAPTER  14 

FOREIGN   CORPORATIONS 

[Page  177.] 

Corporations  Subject  to  Tax.  It  is  not  necessary 
that  the  foreign  corporation  shall  be  engaged  in  busi- 


682  HOLMES   INCOME   TAX   SUPPLEMENT 

ness  in  this  country  or  that  it  have  an  office,  branch,  or 
agency  in  the  United  States.  Liability  to  the  tax  at- 
taches with  respect  to  the  income,  the  source  of  which 
is  in  the  United  States. 

"Source"  as  here  used  means  the  place  of  the  origin 
of  the  income. 

Every  foreign  corporation  having  income  from 
sources  within  the  United  States  must  make  returns  of 
annual  net  income  in  accordance  with  the  rule  set  out 
in  section  12  (b)  of  the  act  of  September  8,  1916,  as 
amended  by  the  act  of  October  3,  1917.  (Reg.  33  Rev., 
Art.  66.) 

[Page  180.] 

Foreign  Governments.  Section  30  of  the  act  of  Sep- 
tember 8,  1916,  as  amended  by  the  act  of  October  3, 
»1917,  provides  that  the  income  of  foreign  Governments 
received  from  investments  in  the  United  States  in 
stocks,  bonds,  or  other  domestic  securities  owned  by 
them,  or  from  interest  on  deposits  in  banks  in  the 
United  States  of  money  belonging  to  such  foreign  Gov- 
ernments, is  exempt  from  the  tax  imposed  by  this  title. 
This  does  not,  however,  exempt  from  the  tax  any  in- 
come collected  by  foreign  Governments  from  invest- 
ments in  the  United  States  in  stocks,  bonds,  or  other 
domestic  securities,  which  are  not  bona  fide  owned  by 
but  are  loaned  to  such  foreign  Governments.  The  ex- 
emption here  provided  for  is  predicated  upon  the  fact 
that  the  securities  or  moneys  from  which  income  is  de- 
rived are  actually  owned  by  such  foreign  Governments. 
(Reg.  33  Rev.,  Article  87.) 

[Page  181.] 

Collection  of  the  Tax  at  the  Source.  If  for  any  rea- 
son there  is  included  in  the  return  which  a  foreign  cor- 


INCOME   TAX    RULINGS  GSo 

poration  is  required  to  make  of  all  income  received 
from  sources  within  the  United  States  any  income  upon 
which  tax  has  been  withheld  at  the  source,  such  foreign 
corporation  may  take  credit  againsl  tin-  amount  of  tax 

due  for  the  amount  of  the  lax  so  withheld  at  the  source ; 
provided  a  statement  is  attached  1o  the  return  setting 
forth  the  source  and  amount  of  the  income  upon  which 
the  tax  was  so  withheld,  i  I J  eg.  33  Rev.,  Art.  201.) 


CHAPTER  15 

EXEMPT    CORPORATIONS 

[Page  194.] 

Where  Question  as  to  Right  of  Exemption  Exists. 
In  every  instance  wherein  exemption  is  conditioned 
upon  the  ground  that  no  part  of  the  net  income  re- 
ceived by  corporations  inures  to  the  benefit  of  any  pri- 
vale  stockholder  or  individual,  it  will  be  necessary,  be- 
fore such  organizations  will  be  classed  as  exempt,  for 
them  to  show  to  the  satisfaction  of  the  collector  or  the 
Commissioner  of  Internal  Revenue: 

(1)  The  character  and  purpose  of  the  organization; 

(2)  The  source  from  which  all  its  income  is  derived; 

(3)  "What  disposition  is  made  of  such  incomes;  and 

(4)  Whether  or  not  any  of  it  is  credited  to  surplus 
or  inures  or  may  inure  to  the  benefit  of  any  private 
stockholder  or  individual.     (Reg.  33  Rev.,  Art.  78.) 

[Page  197.] 
Domestic  Building  and  Loan  Associations.     A  domes- 

tic  building  and  loan  association  entitled  to  exemption 
is  one  organized  under  and  pursuant  to  the  laws  of  the 
Tinted  States  or  under  and  pursuant  to  the  laws  of 


684      .  HOLMES   INCOME   TAX  SUPPLEMENT 

some  State  or  Territory  thereof,  and  which  is  actually- 
carrying  on  for  the  benefit  of  its  members  a  building 
and  loan  association,  business  in  accordance  with  the 
laws  under  which  it  is  organized.  The  fact  that  such 
an  association  issues  fully  paid  or  prepaid  shares,  call- 
ing for  a  specified  rate  of  interest  or  dividends,  will  not 
disqualify  it  for  exemption.  The  exemption  is  with- 
out qualfication  other  than  that  the  association  is  a 
domestic  building  and  loan  association.  If  a  corpora- 
tion by  any  other  name  is  carrying  on  an  exclusive 
building  and  loan  business,  before  it  is  entitled  to  ex- 
emption it  will  be  incumbent  upon  it  to  show  to  the 
satisfaction  of  the  Commissioner  of  Internal  Revenue 
that  it  is  in  fact  a  building  and  loan  association.  (Reg. 
33  Rev.,  Art.  70.) 

[Page  199.] 

Cemetery  Companies.  A  cemetery  company  having 
a  capital  stock  represented  by  shares,  or  which  is  oper- 
ated for  profit  or  for  the  benefit  of  others  than  its  mem- 
bers, does  not  come  within  the  exempted  class,  and  will 
be  required  to  make  returns  of  annual  net  income  and 
pay  any  income  tax  thereby  shown  to  be  due. 

In  the  case  of  such  company  a  reserve  set  aside  out 
of  profits  as  a  "maintenance  fund"  is  not  deductible 
from  gross  income,  and  any  accretions  to  such  fund 
will  be  held  to  be  income,  and  as  such,  must  be  re- 
turned by  the  corporation.  The  expenses  of  mainte- 
nance will  be  deductible  as  they  are  paid.  (Reg.  33 
Rev.,  Art.  71.) 

[Page  199.] 

Clubs.  If  a  club,  by  reason  of  the  comprehensive 
powers  granted  in  its  charter,  engages  in  traffic,  in  agri- 


INCOME   TAX    RULINGS  685 

culture,  or  horticulture,  in  the  sale  of  real  estate,  tim- 
ber, etc.,  for  profit,  it  will  be  held  that  such  club  is  not 
organized  and  operated  exclusively  for  pleasure,  rec- 
reation, or  social  purposes.  It  thus  becomes  a  business 
or  commercial  enterprise,  and  any  profit  realized  from 
such  activities  is  subject  to  the  tax  imposed  by  this 
title,  and  the  club  so  operated  must  make  returns  of  an- 
nual net  income.     (Reg.  33  Rev.,  Art.  72.) 

[Page  201.] 

Cooperative  Dairies.  Cooperative  dairy  companies 
or  associations  not  having  capital  stock  and  engaged 
in  collecting  milk  and  disposing  of  the  same  or  the 
products  thereof,  and  distributing  the  proceeds  of  the 
business,  less  necessary  operating  expenses,  among 
their  patrons,  upon  the  basis  of  the  quantity  of  butter 
fat  in  the  milk  furnished  by  such  patrons,  are  held  to 
be  exempt  from  the  tax  imposed  by  this  title.  (Reg.  30 
Rev.,  Art.  76.) 

[Page  202.] 

Associations  for  Marketing  Produce.  Cooperative 
associations,  in  order  to  come  within  the  exemption 
provided  in  paragraph  "eleventh"  must  establish  to 
the  satisfaction  of  the  collector  or  Commissioner  of 
Internal  Revenue  the  fact  that,  for  their  own  account, 
they  have  no  net  income,  their  business  being  to  market 
the  products  of  their  members,  and  that  the  entire  pro- 
ceeds of  such  marketing,  less  necessary  selling  ex- 
penses, are  turned  back  or  paid  to  the  members  on  the 
basis  of  the  quantity  of  produce  furnished  by  them — 
quality  and  grade  being  considered — as  the  purchase 
price  of  such  produce. 

If  in  the  course  of  their  business  such  associations 


686  HOLMES   INCOME    TAX   SUPPLEMENT 

purchase  for  cash  at  a  stipulated  price  articles  or  prod- 
uce with  a  view  to  selling  them  for  gain,  it  will  be 
held  that  such  associations  are  organized  for  profit  and 
such  associations  will  be  required  to  make  returns  of 
annual  net  income  and  include  therein,  for  the  purpose 
of  the  tax,  all  income  derived  from  such  transactions. 
If  amounts  paid  to  members  are  based  solely  upon  the 
quantity  of  produce  furnished,  such  amounts  may  be 
deducted  from  the  gross  proceeds  of  sales,  and  the  tax- 
able net  income  will  be  the  amount  of  earnings  passed 
to  surplus,  or  distributed  or  distributable  among 
members  on  the  basis  of  their  stock  holdings.  (Reg. 
33  Rev.,  Art.  75.) 

[Page  204.] 

Federal  Reserve  Banks.  Dividends  paid  by  member 
banks  are  not  exempt  from  tax.  (Reg.  33  Rev.,  Art. 
86.) 

CHAPTER  16 

INCOME — IN    GENERAL 

[Page  208.] 

Constructive  Receipt  of  Income.  Actual  receipt  is  a 
reduction  to  possession.  Constructive  receipt  is  where 
income  is  credited  to  or  made  available  to  recipients 
and  is  to  be  reported  as  in-come;  as  credit  to  account 
of  recipients  of  savings-bank  interest,  etc.  (Reg.  33 
Rev.,  Art.  4.) 

[Page  211.] 

Inventory.  Under  date  of  December  19,  1917,  the 
Treasury  Department  altered  its  long-established  rule 
of  permitting  inventories  on  the  basis  of  cost  only.  In 
T.  D.  2609,  issued  on  that  date,  it  was  held  as  follows  : 


[NCOME   TAX    RULINGS  *>s< 

1.  For  the  purposes  of  income  and  excess  profits  tax 
id  urns,  inventories  of  merchandise,  etc.,  and  of  securi- 
ties, will  be  subject  to  the  following  rules: 

A.  Inventories  of  supplies,  r;i\v  materials,  work  in 
process  of  production  and  unsold  merchandise,  must 
be  taken  either  (a)  a1  cost,  or  (b)  at  cost  or  market 
price  which  v\rv  is  lower:  provided  t hat  the  method 
adopted  must  be  adhered  to  in  subsequent  years  unless 
another  be  authorized  by  the  Commissioner  of  Internal 
Revenue. 

B.  A  dealer  in  securities  who  in  his  books  of  account 
regularly  inventories  unsold  securities  on  hand  either 
(a)  at  cost,  or  (b)  at  cost  or  market  price  which  ever 
is  lower,  may  for  the  purpose  of  income  and  excess 
profits  taxes  make  his  return  upon  the  basis  upon  which 
his  accounts  are  kept  provided  that  a  description  of  the 
method  employed  shall  be  included  in  or  attached  to 
the  return,  that  all  the  securities  must  be  inventoried 
by  the  same  method,  and  that  such  method  must  be 
adhered  to  in  subsequent  years  unless  another  be  au- 
thorized by  the  Commissioner  of  Internal  Revenue. 

C.  Gain  or  loss  resulting  from  the  sale  or  disposition 
of  assets  inventoried  as  above  must  be  computed  as 
the  difference  between  the  inventory  value  and  the 
price  or  value  at  which  sold  or  disposed  of. 

2.  In  all  other  cases  inventories  must  be  taken  at 
cost  or  at  value  as  of  March  1,  1913,  as  the  case  may  be. 

[Page  215.] 

Stock  Received  in  Exchange  for  Property.  1 1*  a  cor- 
poration sells  its  capital  assets  in  whole  or  in  part  ami 
the  purchase  price  is  paid  with  stock  issued  by  the  pur- 
chasing company,  the  purchase  price  will  be  the  actual 


688  HOLMES    INCOME   TAX   SUPPLEMENT 

value  at  the  time  of  the  stock  issued  in  payment  for 
such  assets.    (Reg.  33  Rev.,  Art.  101.) 

[Page  216.] 

Reorganization  of  Corporations.  In  a  case  wherein 
a  corporation  acquires  from  stockholders  the  stock  of 
another  corporation,  giving  in  exchange  therefor  its 
own  stock,  it  is  held  the  transaction  is  one  by  which 
the  corporation  acquiring  the  stock  becomes  the  sole 
stockholder  of  the  other  corporation.  As  a  result  of 
this  transaction  no  income  accrues  to  the  corporation 
whose  stock  is  thus  acquired.  Neither  will  any  income 
accrue  to  this  corporation  if  later  the  holding  corpora- 
tion should  cause  the  assets  of  the  underlying  company 
to  be  transferred  to  it  for  mere  nominal  consideration. 

If,  however,  one  corporation  buys  the  assets  of  an- 
other and  issues  direct  to  the  selling  company  its-  own 
capital  stock  in  payment  for  the  assets  acquired,  the 
transaction  will  be  treated  by  the  selling  company  as  a 
sale  of  its  assets,  and  the  question  as  to  whether  profit 
or  loss  results  from  the  sale  will  depend  upon  whether 
or  not  the  value  of  the  stock  taken  in  payment  for  the 
assets  is  in  excess  of  the  fair  market  price  or  value  as 
of  March  1,  1913,  of  the  assets  sold  or  of  their  cost  ac- 
cordingly as  they  were  acquired  by  the  selling  com- 
pany prior  or  subsequent  to  that  date. 

If  the  value  of  the  stock  is  so  in  excess,  the  amount 
of  such  excess*  will  be  taxable  income  for  the  year  in 
which  the  assets  were  sold  and  must  be  so  returned. 

If  the  excess  over  value  as  of  March  1,  1913,  or  over 
cost,  as  the  case  may  be,  includes  any  surplus  earned 
since  March  1,  1913,  upon  which  the  income  tax  has 
been  paid,  the  excess  or  profits  resulting  from  the  sale 


INCOME   TAX   RULINGS  689 

may  be  reduced  by  the  amount  of  such  tax-paid  sur- 
plus. 

If  the  purchasiug  corporation  takes  over  all  the  as- 
sets including  accounts  receivable,  bills  receivable,  sur- 
plus, etc.,  of  the  selling  corporation  and  assumes  its  lia- 
bilities, the  amount  so  assumed  will  be  considered  a  part 
of  the  purchase  price,  and  to  the  extent  that  the  entire 
purchase  price  exceeds  the  cost  or  value,  as  of  March  1, 
1913,  as  the  case  may  be  of  the  assets  disposed,  in- 
come will  accrue  to  the  selling  company.  (Reg.  33 
Rev.,  Art.  124.) 

[Page  221.] 

Payment  by  Warrants.  In  cases  wherein  warrants 
are  issued  by  a  city,  town,  or  other  political  subdi- 
vision of  a  State,  and  are  accepted  by  the  contractor 
in  payment  for  public  work  done,  the  face  value  of 
such  warrants  must  be  returned  as  income  for  the 
year  in  which  they  are  received.  If,  for  any  reason, 
the  contractor  upon  conversion  of  the  warrants  into 
cash,  does  not  receive  and  cannot  recover  the  full  face 
value  of  the  warrants  so  returned,  he  may  allowably 
deduct  from  gross  income  for  the  year  in  which  the 
warrants  are  converted  into  cash,  any  loss  sustained, 
which  loss  will  be  measured  by  the  difference  between 
the  face  value  of  the  warrants  returned  as  income 
and  the  amount  actually  received  for  them  in  cash, 
or  its  equivalent,  when  redeemed  or  disposed  of.  (Reg. 
33  Rev.,  Art.  108.) 

[Page  221.] 

Living  Quarters,  Board  or  Lodging.  Where  service 
is  rendered  for  stipulated  price,  wage,  or  salary  and 
paid  with  something  other  than  money,  the  stipulated 


690  HOLMES    INCOME    TAX   SUPPLEMENT 

value  of  service  in  terms  of  money  is  the  value  at  which 
the  thing  taken  in  payment  is  to  be  considered  for 
the  purpose  of  the  income  tax. 

Where  there  is  no  stipulation  as  to  the  value  of  serv- 
ice and  payment  for  service  is  made  with  something 
other  than  money,  the  market  or  reasonable  value  of 
the  thing  taken  in  payment  is  the  amount  to  be  in- 
cluded as  income  for  the  purposes  of  the  income  tax. 
(Reg.  33  Rev.,  Art.  4.) 

[Page  223.] 

Income  Taxable  in  Year  Received.  In  the  case  of 
compensation  for  service  rendered,  where  no  determi- 
nation of  compensation  is  had  until  the  completion 
of  the  service,  the  amount  received  in  consideration 
of  the  service  is  income  to  be  accounted  for  as  for 
the  calendar  year  of  its  receipt. 

Where  the  service  and  payment  period  is  divided 
by  the  end  of  the  taxable  year,  the  compensation  for 
the  period  so  divided  at  the  end  of  the  year  will  be 
accounted  for  as  income  for  the  year  in  which  pay- 
ment is  actually  received.  Where  the  service  is  com- 
pensated by  fee,  or  is  of  such  nature  that  no  part  of 
the  fee  or  compensation  becomes  due  until  the  com- 
pletion of  the  service,  the  entire  amount  received 
should  be  income  to  be  accounted  for  as  for  the  year 
of  receipt. 

A  person  having  a  salary  by  the  year  and  in  addi- 
tion commissions  on  sales,  the  salary  to  be  paid  at 
the  time  commissions  are  determined,  and  the  deter- 
mination of  commissions  is  in  the  succeeding  calendar 
year,  the  entire  amount  of  salary  and  commission 
should  be  accounted  for  as  income  of  the  calendar  year 
of  receipt.     (Reg.  33  Rev.,  Art.  4.) 


INCOME   TAX   RULINGS  691 

[Page  226.] 

Exempt  Income.  Where  the  entire  income  of  an 
individual  is  from  tax-exempt  bonds  and  where  the 
amount  of  income  other  than  that  from  tax-exempt  se- 
curities is  less  than  the  amount  of  income  for  which 
a  return  is  required,  no  return  of  income  is  to  be  made. 
Interest  from  securities  which  is  exempt  from  tax 
under  section  4  of  the  Income  Tax  Law  is  not  to  be 
included  in  returns  of  income.    (Reg.  33  Rev.,  Art.  26.) 

[Page  228.] 

"Paid"  or  "Actually  Paid."  "Paid"  or  "actually 
paid,"  within  the  meaning  of  this  title,  does  not  neces- 
sarily contemplate  that  there  shall  be  an  actual  dis- 
bursement in  cash  or  its  equivalent.  If  the  amount 
involved  represents  an  actual  expense  or  element  of 
cost  in  the  production  of  the  income  of  the  year,  it 
will  be  properly  deductible  even  though  not  actually 
disbursed  in  cash,  provided  it  is  so  entered  upon  the 
books  of  the  company  as  to  constitute  a  liability  against 
its  assets,  and  provided  further  that  the  income  is 
also  returned  upon  an  accrued  basis. 

If  in  the  course  of  its  business,  a  corporation  credits 
the  accounts  of  individuals,  firms,  or  corporations  with 
the  amount  of  any  expenses,  interest,  rentals,  wages, 
etc.,  due  them,  thereby  making  them  subject  to  the 
personal  drawings  of  such  creditors,  or  if  expenses 
actually  incurred  are  vouchered  in  definite  amounts, 
the  amounts  so  credited  or  vouchered  may  be  treated 
as  paid,  and  if  the  amounts  so  credited  or  vouchered 
are  expenses  incurred  concurrently  with  and  in  the 
production  of  the  income  of  the  year,  they  may  be 
allowably  deducted  therefrom. 

This  ruling  must  not  be  construed  to  allow  as  a 
F.  I.  Tax  Supp  —  3 


692  HOLMES    INCOME   TAX   SUPPLEMENT 

deduction  any  accrued  charges  which  if  paid  in  cash 
or  otherwise  would  not  be  deductible.  (Reg.  33  Rev. 
Art.  126.) 

Approved  Accounting  Practices.  Pursuant  to  the 
foregoing  provision,  corporations  keeping  their  ac- 
counts in  strict  accord  with  the  methods  prescribed 
by  municipal,  State,  or  Federal  authorities,  or  in  ac- 
cord with  approved  standard  accounting  practices  con- 
sistently followed  from  year  to  year,  will  be  permitted 
to  make  their  returns  of  annual  net  income  on  the 
basis  of  the  accounts  so  kept,  provided  such  systems 
of  accounting  clearly  and  correctly  reflect  the  net  in- 
come of  each  year. 

Charged  Against  Current  Earnings.  All  expenses, 
including  interest,  taxes,  and  other  necessary  charges, 
incidental  and  necessary  to  the  creation  or  production 
of  the  gross  income  or  properly  chargeable  against  the 
same,  being  deductible  from  the  gross  income,  whether 
paid  in  cash  or  entered  on  the  books  as  a  liability, 
can  not,  if  unpaid,  be  carried  forward  to  be  deducted 
from  the  gross  income  of  a  subsequent  year. 

Each  Year's  Return  Complete.  Each  year's  return, 
both  as  to  income  and  deductions  therefrom,  must  be 
complete  within  itself.  Charges,  of  whatever  character, 
against  income  can  not  be  cumulative.  They  must  be 
deducted  from  the  income  of  the  year  in  which  in- 
curred or  not  at  all.  The  expenses,  liabilities,  or  de- 
ficit of  one  year  can  not  be  used  to  reduce  the  income 
of  a  subsequent  year. 

The  deductions  must  in  all  cases  be  such  as  are 
authorized  and  within  the  limits  fixed  by  law.  (Reg. 
33  Rev.,  Art.  127.) 

Previous  Year's  Charges  Not  Deductible  A  corpora- 
tion having  the  right  under  this  rule  to  deduct  all  au- 


INCOME   TAX   RULINGS  693 

thorized  allowances,  whether  paid  in  cash  or  set  up  as 
a  liability,  it  follows  that  if  it  does  not  within  any 
year  pay  or  accrue  certain  of  its  expenses,  inter 
taxes,  or  other  charges,  and  makes  no  deduction  there- 
for, it  cannot  deduct  from  the  income  of  the  next  or 
subsequent  year  any  amounts  then  paid  in  liquidation 
of  the  previous  year's  liabilities. 

Amended  Returns.  If,  however,  a  corporation  dis 
covers  or  detects  expenses  or  liabilities  which  were  due 
and  payable  during  a  preceding  year,  it  will  be  per- 
missible for  it  to  make  an  amended  return  for  the 
year  to  which  such  expense  or  liability  applies,  include 
such  expense  in  the  deductions  of  that  year,  and  file 
a  claim  for  refund  for  any  taxes  overpaid  by  reason 
of  failure  to  deduct  such  expense  or  liability  in  the 
original  return  of  that  year. 

Any  system  of  accounting  which  is  not  consistent 
with  the  purpose  and  intent  of  the  rules  set  out  in 
this  title,  and  with  the  general  rules  set  out  in  these 
regulations  for  the  ascertaining  of  net  income,  will  not 
be  accepted  as  a  correct  basis  for  making  returns. 
(Reg.  33  Rev.,  Art.  128.) 


CHAPTER  17 

INCOME    FROM    PERSONAL    SERVICES 

[Page  233.] 

Per  Diem  Allowance.  The  total  allowance  is  income 
and  there  may  be  taken  as  a  deduction  for  expense. 
the  amount  actually  expended  from  such  allowance 
for  actual  necessary  traveling  expenses.  (Reg.  33  Rev., 
Art.  8.)  ■ 


G94  HOLMES   INCOME   TAX   SUPPLEMENT 

[Page  234.] 

Compensation  of  Officers  and  Employees  of  a  State 
or  Political  Subdivision  Thereof.  An  individual  who 
enters  into  a  contract  with  a  State,  or  any  political 
subdivision  thereof,  for  the  doing  of  a  thing  or  things 
specified  by  the  contract,  the  completion  of  which 
will  constitute  a  fulfillment  of  the  contract  on  the 
part  of  such  individual,  is  not  an  officer  or  employee 
of  the  State  or  political  subdivision  thereof  within 
the  meaning  and  intent  of  section  4  of  the  income  tax 
law  and  the  amount  received  by  him  from  the  State 
or  political  subdivision  thereof  under  the  terms  of  the 
contract  is  to  be  accounted  for  as  income.  (Reg.  33 
Rev.,  Art.  4.) 

CHAPTER  18 

INCOME  FROM    BUSINESS,   TRADE  OR   COMMERCE 

[Page  237.] 

Inventory.  Under  date  of  December  19,  1917,  the 
Treasury  Department  altered  its  long-established  rule 
of  permitting  inventories  on  the  basis  of  cost  only. 
In  T.  D.  2609  issued  on  that  date  it  was  held  that  in- 
ventories should  be  taken  at  cost  or  market  value 
which  ever  was  the  lower.  The  complete  text  of  this 
T.  D.  appears  on  page supra. 

[Page  238.] 

Income  of  Contracting  Companies.  Corporations  en- 
gaged in  contracting  operations  and  which  have  nu- 
merous uncompleted  contracts,  which  in  some  cases  run 
for  periods  of  several  years,  will  be  allowed  to  pre- 
pare their  returns  so  that  the  gross  income  will  be 
arrived  at  on  the  basis  of  completed  work — that  is, 


INCOME    TAX    RULINGS  695 

on  jobs  which  have  been  finally  completed — any  and 
all  moneys  received  in  payment  for  completed  jobs 
will  be  returned  as  income  for  the  year  in  which  the 
work  was  completed.  ]f  the  gross  income  is  arrived 
at  by  this  method,  the  deduction  from  gross  income 
should  be  limited  to  the  expenditures  made  on  account 
of  such  completed  contracts. 

Or  the  percentage  of  profit  from  the  contract  may 
be  estimated  on  the  basis  of  percentage  of  completion 
and  payments  made  thereon,  in  which  case  the  in- 
come to  be  returned  each  year  during  the  performance 
of  the  contract  will  be  computed  upon  the  basis  of  the 
expenses  incurred  on  such  contract  during  the  year; 
that  is  to  say,  if  one-half  of  the  estimated  expenses 
necessary  to  the  full  performance  of  the  contract  are 
incurred  during  one  year,  one-half  of  the  gross  con- 
tract price  should  be  returned  as  income  for  that 
year;  all  under  or  over  statements  of  income  to  be 
adjusted  upon  completion  of  the  contract  and  return 
made  accordingly. 

In  cases  wherein  contracts  are  fully  performed  in 
one  year,  although  payment  therefor  may  be  deferred 
until  the  next,  the  income  resulting  from  the  per- 
formance of  the  contract  shall  be  returned  for  the 
year  in  which  it  was  actually  earned  and  determined. 
(Reg.  33  Rev.,  Art.  121.) 

[Page  239.] 

Bank  Discounts.  In  cases  wherein  banks  or  other 
corporations  loan  money  by  discounting  bills  or  notes, 
one  of  two  methods  shall  be  used  in  determining  the 
amount  of  discount  that  is  to  be  reported  as  income, 
namely  (1)  if  the  bank  or  corporation  makes  a  prac- 
tice of  crediting  such  discount  directly  to  a  "discount 


696  HOLMES   INCOME   TAX   SUPPLEMENT 

account"  or  to  profit  and  loss,  and  total  amount  thus 
credited  during  the  year  shall  be  considered  income 
and  shall  be  so  reported,  regardless  of  the  fact  that 
a  portion  of  this  amount  may  represent  discount  paid 
in  advance  and  not  then  earned;  (2)  if  the  bank  or 
corporation  follows  the  practice  of  crediting  such  dis- 
count to  an  "unearned  discount  account,"  and  later, 
as  the  discount  becomes  earned,  debits  the  unearned 
account  and  credits  an  "earned  discount  account"  with 
the  amount  so  earned,  the  total  amount  credited  to 
the  "earned  discount  account"  during  the  year  shall 
be  considered  income  and  shall  be  so  returned.  The 
corporation  having  income  of  this  character  should 
state  in  a  memorandum  attached  to  its  return  which 
of  the  two  methods  was  used  in  determining  the  amount 
of  discount  returned  as  income.  (Reg.  33  Rev.,  Art. 
114.) 

:      CHAPTER  19 

INCOME  PROM   FARMING 

[Page  242.] 

Farming  Corporations.  Corporations  engaged  in  op- 
erating plantations,  ranches,  stock  farms,  poultry 
farms,  and  lands  used  for  raising  fruit,  truck,  etc., 
including  orchards  of  all  kinds,  shall  make  their  re- 
turns on  the  basis  of  the  products  actually  marketed 
and  sold  during  the  year,  whether  such  products  were 
produced  or  purchased  and  resold. 

All  deductions  shall  be  based  upon  the  legitimate 
expense  incident  to  the  current  year  whether  for  the 
production  of  the  present  or  future  years,  except  that 
in  a  case  wherein  a  corporation  is  engaged  in  produc- 
ing crops  which  take  more  than  a  year  from  the  time 


INCOME   TAX   RULINGS  697 

of  planting,  to  the  process  of  gathering  and  disposal; 
ilic  income  reported  and  expenses  deducted  should  be 
determined  upon  the  crop  basis.  (Keg.  S3  Rev.,  Art. 
123.) 

CHAPTER  22 

INCOME  FROM  INTEREST 

[Page  258.] 

Political  Subdivisions  of  a  State.  However,  a  dis- 
trict without  power  to  exercise  any  govermental  func- 
tion, created  for  the  purpose  of  making  some  improve- 
ment, primarily  beneficial  to  the  property  located  in 
and  comprising  the  district,  is  not,  within  the  mean- 
ing of  these  acts,  a  political  subdivision  of  the  State. 
Obligations  issued  in  payment  for  such  improvement, 
although  guaranteed  by  a  county,  municipality,  or 
other  political  subdivision  of  the  State,  are  not  the 
obligations  of  the  State  or  of  any  political  subdivision 
thereof;  but  are  rather  the  obligations  of  the  benefited 
property  upon  which  they  constitute  a  lien.  Hence,  the 
income  derived  from  obligations  which  are  a  direct 
charge  against  or  lien  upon  benefited  property,  is  not 
exempt  from  these  taxes,  and  must  be  returned  as  in- 
come of  the  recipient.    (Reg.  33  Rev.,  Art.  84.) 

CHAPTER  23 

INCOME    FROM   DIVIDENDS 

[Page  267.] 

Dividends  from  Profits  or  Surplus  of  Prior  Years. 
When  an  individual  receives  dividends  declared  from 
surplus  of  prior  years,  he  will  be  required  to  add  it 
to  his  other  income  for  the  current  vear  as  indicated 


698  HOLMES    INCOME   TAX   SUPPLEMENT 

by  the  following  illustration:  Assume,  for  instance, 
that  an  individual  is  in  receipt  of  $20,000  of  income 
for  the  year  1917  and  also  received  in  1917  $10,000 
from  dividends  out  of  surplus  and  undivided  profits 
accumulated  by  the  paying  corporation  in  1916.  The 
individual  recipient  will  add  the  $10,000  received  in 
the  form  of  such  dividends  to  the  $20,000  received 
from  other  sources  and  will  pay  the  supertax  at  the 
1916  rates  on  the  amount  between  $20,000  and  $30,000. 
If  he  should  also  have  received  dividends  from  sur- 
plus and  undivided  profits  accumulated  in  1915,  1914 
and  1913  he  will  add  the  sum  of  such  dividends  to  the 
total  of  $30,000  and  pay  a  tax  at  the  rates  prescribed 
by  the  act  of  October  3,  1913,  on  the  amount  by  which 
the  total  exceeds  $30,000.  (See  instructions  on  Form 
1040  Revised,  page  2,  Schedule  F.) 

A  corporation  declaring  and  paying  dividends  out 
of  a  surplus  or  earnings  accumulated  over  a  period 
of  years,  should  make  a  record  in  its  books  of  the 
amount  of  dividends  paid  out  of  each  year's  undis- 
tributed surplus  or  profits,  and  advise  the  stockholders 
accordingly,  in  order  that  the  dividends  received  by 
them  may  be  taxed  at  the  respective  rates  prevailing 
during  the  years  in  which  the  surplus  or  profits  so 
distributed  were  earned.     (Reg.  33  Rev.,  Art.  107.) 

Dividends  of  foreign  corporations  received  by  citi- 
zens or  residents  of  the  United  States  are  not  to  be 
apportioned  to  prior  years.  (Telegram  from  Treasury 
Department,  dated  January  30,  1918;  I.  T.  S.  1918, 
Paragraph  3073.) 

[Page  268.] 

Dividends  Deemed  to  Be  from  Most  Recently  Ac- 
cumulated Profits  or  Surplus.     If  a  corporation  dis- 


INCOME   TAX    RULINGS  699 

tributed  dividends  in  1917,  such  dividends  will  be 
deemed  to  have  been  paid  from  the  earnings  of  1917, 
and  the  recipient,  if  an  individual,  will  be  liable  to 
additional  tax,  if  any,  and  if  a  corporation,  to  income 
tax,  at  the  rates  for  the  year  1917,  unless  it  is  shown 
to  the  satisfaction  of  the  Commissioner  of  Internal 
Revenue  that  at  the  time  such  dividends  were  paid, 
the  earnings  up  to  that  time  were  not  sufficient  to 
cover  the  distribution,  in  which  case  the  excess  over 
the  earnings  of  the  taxable  year  will  be  deemed  to 
have  been  paid  from  the  most  recently  accumulated 
surplus  of  prior  years,  and  will  be  taxed  at  the  rate 
or  rates  for  the  year  or  years  in  which  earned.  (Reg. 
33  Rev.,  Art.  107.) 

The  Treasury  Department  has  also  held  that  if  a 
dividend  was  declared  prior  to  August  6,  1917,  out 
of  earnings  or  profits  accrued  prior  to  March  1,  1913, 
such  dividend  will  be  deemed  to  be  from  the  most 
recently  accumulated  profits  (pr  surplus  unless  the 
dividend  was  also  paid  prior  to  August  6,  1917.  In 
other  words,  the  term  "distribution"  as  used  in  the 
law  as  held  by  the  Treasury  Department  to  mean  the 
payment  and  not  the  declaration  of  dividends. 

[Page  271.] 

Dividends  from  Exempt  Income.  Interest  on  State, 
municipal  and  United  States  bonds  received  by  corpora- 
tions is  not  taxable  to  the  corporation.  Upon  amalga- 
mation with  other  funds  of  the  corporation  such  in- 
come loses  its  identity.  When  distributed  to  stock- 
holders as  a  dividend,  the  entire  amount  of  the  divi- 
dend is  subject  to  inclusion  in  returns  of  income  for 
the  purposes  of  the  income  tax. 


700  HOLMES   INCOME   TAX   SUPPLEMENT 

The  foregoing  holds  true  for  scrip  payment  of  in- 
terest.    (Reg.  33  Rev.,  Art.  4.) 

[Page  271.] 

Dividends  from  Reserves  for  Depreciation  or  Deple- 
tion. A  reserve  set  up  out  of  gross  receipts  and  main- 
tained by  a  corporation  for  the  purpose  of  making 
good  any  loss  or  wasting  of  capital  assets  on  account 
of  depreciation  or  depletion  is  not  to  be  considered  a 
part  of  the  earned  surplus  of  the  company,  but  a  re- 
serve for  the  return  or  liquidation  of  capital.  A  divi- 
dend paid  from  such  reserve  will  be  considered  a 
liquidating  dividend  and  will  not  constitute  taxable 
income  to  the  stockholder  except  to  the  extent  that 
the  amount  so  received  is  in  excess  of  the  capital  ac- 
tually invested  by  the  stockholder  in  the  shares  of 
stock  held  by  him,  and  with  respect  to  which  the 
distribution  was  made.     (Reg.  33  Rev.,  Art.  4.) 

[Page  272.] 

Dividends  Paid  in  Equivalent  of  Cash.  Dividends 
declared  by  a  corporation  and  paid  with  securities 
in  which  the  surplus  of  the  corporation  has  been  in- 
vested, regardless  of  the  character  of  such  securities, 
is  to  be  accounted  for  as  a  dividend  for  income  tax 
purposes  by  the  recipients  of  same  to  the  extent  that 
it  represents  a  distribution  of  surplus  accrued  to  the 
corporation  since  March  1, 1913.   (Reg.  33  Rev.,  Art.  4.) 

[Page  274.] 

Stock  Dividends.  The  United  States  Supreme  Court 
on  January  7,  1918,  in  deciding  the. case  of  Towne  v. 
Eisner,  held  that  stock  dividends  were  not  taxable. 
The  opinion  reads  in  part  as  follows:    "Notwithstand- 


INCOME   TAX   RULINGS  701 

ing  the  thoughtful  discussion  that  the  case  received 
below  \ve  can  not  doubt  that  the  dividend  was  capital 
as  well  for  the  purpose  of  the  Income  Tax  Law  as  for 
the  distribution  between  tenant  for  life  and  remainder- 
man. What  was  said  by  this  Court  upon  the  latter 
question  is  equally  true  for  the  former.  A  stock  divi- 
dend really  takes  nothing  from  the  property  of  the 
corporation,  and  adds  nothing  to  the  interest  of  the 
shareholders.  Its  property  is  not  diminished  and  their 
interests  are  not  increased.  *  *  *  The  propor- 
tional interest  of  each  shareholder  remains  the  same. 
The  only  change  is  in  the  evidence  which  represents 
that  interest,  the  new  shares  and  the  original  shares 
together  representing  the  same  proportional  interest 
that  the  original  shares  represented  before  the  issue 
of  the  new  ones.'  Gibbons  v.  Mahon,  136  U.  S.  54D, 
559,  560.  In  short,  the  corporation  is  no  poorer  and 
the  stockholder  is  no  richer  than  they  were  before. 
Logan  County  v.  United  States,  169  U.  S.  255,  261. 
If  the  plaintiff  gained  any  small  advantage  by  the 
change  it  certainly  was  not  an  advantage  of  $117,450, 
the  sum  upon  which  he  was  taxed.  It  is  alleged  and 
admitted  that  he  received  no  more  in  the  way  of  divi- 
dends and  that  his  old  and  new  certificates  together 
are  worth  only  what  the  old  ones  were  worth  before. 
If  the  sum  had  been  carried  from  surplus  to  capital 
account  without  a  corresponding  issue  of  stock  cer- 
tificates, which  there  was  nothing  in  the  nature  of 
things  to  prevent,  we  do  not  suppose  that  any  one 
would  contend  thai  the  plaintiff  had  received  an  ac- 
cession to  his  income.  Presumably  his  certificate  would 
have  the  same  value  as  before.  Again  if  certificates 
for  $1,000  par  were  split  up  in  ten  certificates,  each 
Eor  $100,  we  presume  that  no  one  would  call  the  new 


702  HOLMES    INCOME   TAX   SUPPLEMENT 

certificates  income.  What  has  happened  is  that  the 
plaintiff's  old  certificates  have  been  split  up  in  effect 
and  have  diminished  in  value  to  the  extent  of  the 
value  of  the  new."  Notwithstanding  the  broad  lang- 
uage in  this  opinion,  the  Treasury  Department  has  de- 
clared that  since  only  the  language  of  the  1913  Law  and 
not  the  language  of  the  1916  Law  was  before  the  Court 
in  this  case,  it  does  not  necessarily  follow  that  stock 
dividends  are  not  taxable  under  the  provisions  of  the 
1916  Law  and  the  1917  Law.  Since  the  1916  Law  con- 
tains an  express  provision  taxing  stock  dividends,  the 
Treasury  Department  will  continue  to  be  governed 
by  this  express  provision  and  will  assess  the  tax  on 
such  dividends  unless  and  until  the  Supreme  Court 
holds  otherwise.  The  taxpayers  against  whom  a  tax 
is  assessed  on  such  dividends  should  exercise  care  in 
paying  the  tax  under  protest  and  duress  in  order  to 
protect  their  rights  to  recovery.  Where  stock  divi- 
dends are  reported  in  the  annual  return  of  net  income 
care  should  be  taken  that  they  are  segregated  from 
cash  dividends  and  that  it  be  clearly  shown  either  on 
the  return  or  on  a  rider  attached  to  the  return  that 
the  dividend  was  paid  in  stock  and  that  the  amount 
is  reported  not  as  an  admission  of  liability  for  tax 
thereon,  but  out  of  .courtesy  for  the  Commissioner  of 
Internal  Revenue  and  in  order  to  avoid  the  imposi- 
tion of  penalties  for  an  alleged  false  or  fraudulent 
return. 

Stock  Dividends  Resulting  from  Revaluation  of  As- 
sets. Stock  dividends  declared  from  a  surplus  created 
from  the  revaluation  of  capital  assets  or  a  value  placed 
upon  trademark,  good  will,  etc.,  do  not  represent  a 
distribution  of  earnings  or  profits  subject  to  tax  in 
the  hands  of  the  recipient  shareholder.     The  entire 


INCOME    TAX    RULINGS  703 

proceeds  derived  by  a  shareholder  from  the  sale  of 
such  stock  is  income  subject  to  both  the  normal  and 
additional  tax  and  shall  be  accounted  for  in  the  share- 
holder's return  rendered  for  the  year  in  which  sold. 
(Reg.  33  Rev.,  Art.  4.) 


CHAPTER  25 

INCOME  FROM   MISCELLANEOUS   SOURCES 

[Page  281.] 

Building  and  Loan  Associations.  Amount  credited 
to  shareholders  of  building  and  loan  associations,  when 
title  to  such  credit  passes  to  the  shareholder  at  the 
time  of  the  credit,  has  a  taxable  status  for  the  normal 
and  additional  tax  as  for  the  year  of  the  credit.  AVhere 
the  amount  of  such  accumulations  does  not  become 
available  to  the  shareholder  until  the  maturity  of  a 
share,  the  amount  of  a  share  in  excess  of  the  aggre- 
gate amount  paid  in  by  the  shareholder  is  income 
to  be  accounted  for  as  for  the  year  of  the  maturity 
of  the  share  for  both  the  normal  and  additional  tax. 
(Reg.  33  Rev.,  Art.  4.) 

[Page  281.] 

Damages.  When  a  corporation  as  a  result  of  suit 
or  otherwise  secures  payment  for  damages  which  it 
may  have  sustained,  and  the  amount  of  such  payment 
is  in  excess  of  an  amount  necessary  to  make  good  the 
damage  or  damaged  property,  the  amount  of  such  ex- 
cess shall  be  considered  and  returned  as  income  for 
the  year  in  which  received.  If  the  entire  or  an  esti- 
mated amount  of  the  damage  shall  have  been  pre- 
viously charged  off  and  deducted  from  gross  income, 


704  HOLMES    INCOME   TAX   SUPPLEMENT 

then  the  amount  recovered  shall  be  returned  as  in- 
come.    (Reg.  33  Rev.,  Art.  94.) 

[Page  285.] 

Stock  Received  as  Bonus.  Where  common  stock  is 
received  as  a  bonus  in  consideration  of  the  purchase 
of  preferred  stock,  the  common  stock  has  no  taxable 
status  The  entire  proceeds  derived  from  the  sale  or 
transfer  of  such  stock  is  income  subject  to  the  normal 
and  additional  tax.     (Reg.  33  Rev.,  Art.  4.) 

[Page  285.] 

Sale  of  Bonds  at  Premium.  If  bonds  are  sold  at  a 
premium,  the  premium  must  be  reported  as  income. 
(Reg.  33  Rev.,  Art.  150.) 


CHAPTER  26 

RECEIPTS  WHICH  ARE  IN  PART  RETURN   OF   CAPITAL 

[Page  292.] 

Instalment  Payments.  Corporation  selling  furni- 
ture, musical  instruments,  clothing,  furnishings,  etc., 
on  the  instalment  basis,  title  passing  to  the  vendee 
at  the  time  of  sale,  will  treat  such  contracts  as  ac- 
counts receivable  and  as  "sales  during  the  year"  at 
their  face  value,  thus  accounting  for  as  income  the 
difference  between  the  cost  and  the  sales  price.  If 
the  purchaser  defaults  in  payment  and  the  account 
becomes  uncollectible  and  the  uncollected  balance  is 
charged  off,  the  amount  so  charged  off  may  be  de- 
ducted as  a  loss.     (Reg.  33  Rev.,  Art.  120.) 


INCOME    TAX   RULINGS  705 

CHAPTER  27 

DEDUCTIONS — IN  GENERAL 

[Page  299.] 

Accruals.  Corporations  keeping  hooks  of  account 
on  an  accrual  basis  may  deduct  from  gross  iiicome  ac- 
crued interest  for  the  year  when  shown  as  a  charge 
against  accrued  income  upon  the  books  of  account. 
(T.  D.  2625.) 

[Page  302.] 

Voluntary  Destruction  of  Property.  Loss  due  to 
the  voluntary  removal  or  demolition  of  old  buildings, 
the  scrapping  of  old  machinery,  equipment,  etc.,  in- 
cident  to  renewals  and  replacements  will  be  deductible 
from  gross  income,  in  an  amount  representing  the 
difference  between  the  cost  of  such  property  demolished 
or  scrapped  and  an  amount  measuring  a  reasonable 
allowance  for  the  depreciation  which  the  property  had 
undergone  prior  to  its  demolition  or  scrapping ;  that 
is  to  say,  the  deductible  loss  is  only  so  much  of  the 
original   cost,   less  salvage,   as   would   have   remained 

unextinguished    had     a    reasonable    allowance     1 n 

charged  off  for  depreciation  during  each  year   prior 
to  its  destruction. 

\Yhen  a  corporation  buys  real  estate,  upon  which 
is  located  a  building  or  buildings,  which  it  proceeds 
to  raze,  with  a  view  to  erecting  thereon  another  build 
ing  or  buildings,  it  will  he  held  that  the  corporation 
has  sustained  no  deductible  loss  hv  reason  of  the  demo- 
lition of  the  old  building  or  buildings.  In  such  case 
it  will  he  considered  that  the  value  of  the  real  estate. 
exclusive   of   old    improvements,    is   equal    to   the   pur- 


706  HOLMES   INCOME   TAX   SUPPLEMENT 

chase  price  of  the  land  and  buildings.     (Reg.  33  Rev., 
Arts.  155  and  156.) 

[Page  303.] 

Investment  of  Capital.  Investments  of  capital  are 
not  deductible.  The  following  have  been  held  to  be 
investments  of  capital  and  not  expenses:  (a)  Amounts 
expended  for  securing  copyright  and  plates  which  re- 
main in  possession  of  and  as  property  of  the  person 
making  the  payments,  are  investments  of  capital  and 
can  not  be  allowed  as  deductions  in  returns  of  income, 
(b)  Cost  of  defending  title  or  perfecting  title  to  prop- 
erty, constitutes  a  part  of  the  cost  of  the  property  and 
is  not  a  business  expense,  (c)  The  amount  expended 
for  architect's  services  is  part  of  the  cost  of  the  build- 
ing and  not  a  deductible  business  expense,  (d)  Com- 
missions paid  in  purchasing  and  selling  securities  are 
a  part  of  the  cost  or  selling  price  of  the  securities  and 
not  otherwise  deductible.  They  do  not  constitute  ex- 
pense deductions  in  a  return  of  income.  (Reg.  33  Rev., 
Art.  8.) 


CHAPTER  28 

DEDUCTION   OP  BUSINESS  EXPENSES 

[Page  306.] 
Sums  Expended  for  Materials  Used  and  on  Hand. 

If  a  corporation  carries  materials  or  supplies  on  hand 
for  which  no  record  of  consumption  is  kept  or  of  which 
physical  inventories  at  the  beginning  and  end  of  the 
year  are  not  taken,  it  will  be  permissible  for  the  cor- 
poration to  include  in  its  expenses  and  deduct  from 
gross  income  the  total  cost  of  such  supplies  and  ma- 


INCOME   TAX   RULINGS  707 

terials  as  were  purchased  during  the  year  for  which 
the  return  is  made.     (Reg.  33  Rev.,  Art.  130.) 

[Page  306.] 

Commissions.  Commissions  paid  in  purchasing  and 
selling  securities  are  a  part  of  the  cost  or  selling  price 
of  the  securities  and  not  otherwise  deductible.  They 
do  not  constitute  expense  deductions  in  a  return  of 
income.     (Reg.  33  Rev.,  Art.  8.) 

[Page  307.] 

Redemption  of  Trading  Stamps.  Corporations,  mer- 
cantile or  otherwise,  which  issue  trading  stamps,  cou- 
pons, etc,  for  the  purpose  of  increasing  their  busi- 
ness, which  stamps  or  coupons  are  redeemable  in  mer- 
chandise, may  allowably  deduct  from  gross  income 
as  a  business  expense  the  amount  which  such  corpora- 
tions actually  expend  for  such  stamps  or  coupons,  and 
also  the  actual  cost  to  the  corporations  of  the  mer- 
chandise given  in  redeeming  the  same.  This  rule  con- 
templates that  a  reserve  set  up  as  a  liability  equal  to 
the  redemption  value  of  the  stamps  or  coupons  issued 
is  not,  as  such,  an  allowable  deduction,  the  deduction 
being  limited  to  the  cost  of  the  stamps  or  coupons 
and  the  merchandise  with  which  they  are  redeemed. 
(Reg.  33  Rev.,  Art.  141.) 

[Page  311.] 

Rent  for  Residential  Property.  In  the  case  of  a  pro- 
fessional man  who  rents  a  property  for  residential  pur- 
poses but  receives  there  clients,  patients,  or  callers  in 
connection  with  his  professional  work  (the  place  of 
business  being  elsewhere)  no  part  of  the  rent  is  de- 
ductible as  business  expense.  (Reg.  33  Rev.,  Art.  8.) 
F.  T.  Tax  Supp. — 4 


/OS  HOLMES   INCOME   TAX   SUPPLEMENT 

[Page  312.] 

Life  Insurance  Premiums.  The  provision  of  Sec- 
tion 32  of  the  Act  of  September  8,  1916,  that  premiums 
paid  on  life  insurance  policies  covering  the  lives  of 
officers,  employees,  or  those  financially  interested  in 
any  trade  or  business  conducted  by  an  individual, 
partnership,  or  corporation,  may  not  be  deducted  as 
a  part  of  the  annual  expense,  applies  to  all  forms 
of  life  insurance,  the  premiums  upon  which  the  in- 
dividual, partnership  or  corporation  may  pay  who 
ever  may  be  the  beneficiaries.    (Reg.  33  Rev.,  Art.  236.) 

[Page  315.] 

Allowances  to  Minor  Children.  The  father  is  legally 
entitled  to  the  service  of  his  minor  children.  As  a  rule, 
allowances  which  he  gives  them,  whether  said  to  be  in 
consideration  of  service  or  otherwise,  are  not  allow- 
able deductions,  in  his  return  of  income  nor  are  they 
income  to  the  children.     (Reg.  33  Rev.,  Art.  8.) 

[Page  315.] 

Bonus  and  Profit  Sharing  Payments.  The  earlier 
rulings  on  this  subject  have  been  modified  by  a  recent 
decision  which  holds  that  special  payments,  sometimes 
denominated  gifts  or  bonuses,  made  by  corporations,  part- 
nerships, or  individuals  to  officers  or  employees,  will 
constitute  allowable  deduction  from  gross  income  in 
ascertaining  net  income  for  the  purpose  of  the  income 
tax,  when  such  payments  are  made  in  good  faith  and 
as  additional  compensation  for  the  services  actually 
rendered  by  the  officers  or  employees.  If  such  pay- 
ments, when  added  to  the  stipulated  salaries  do  not 
exceed  a  reasonable  compensation  for  the  services  ren- 
dered, they  will  be  regarded  as  a  part  of  the  wage  or 
hire  of  the  officer  or  employee,  and  therefore  an  ordi- 


INCOME   TAX   RULINGS  709 

nary  and  necessary  expense  of  operation  and  main- 
tenance, and  as  .sueh  will  be  deductible  from  gross 
ineoine. 

Special  payments  made  to  officers  or  employees,  al- 
though in  the  form  of  additional  salaries  or  compensa- 
tion, will  be  regarded  as  a  special  distribution  of 
profits  or  compensation  for  the  capital  invested,  and 
not  as  payment  for  services  rendered,  if  the  amount 
of  such  payments  is  based  upon  or  bears  a  close  rela- 
tionship to  the  stock  holdings  of  such  officers  or  em- 
ployees, or  to  the  capital  invested  by  them  in  the  busi- 
ness. Payment  under  such  latter  conditions  being 
in  the  nature  of  dividends  or  distribution  of  profits 
will  not  be  deductible  from  gross  income. 

Salaries  of  officers  or  employees,  who  are  stockhold- 
ers or  have  an  interest  in  the  business,  will  be  subject 
to  careful  analysis,  and  if  they  are  found  to  be  rather 
in  proportion  to  the  stock  holdings  or  interest  of  such 
officers  and  employees  than  to  the  real  value  of  tin- 
services  rendered  and  to  be  in  excess  of  the  salaries 
paid  to  officers  or  employees  in  similar  positions  in 
other  concerns  doing  business  of  a  like  nature  and  of 
approximately  equal  volume  and  earnings,  the  amount 
paid  in  excess  of  reasonable  compensation  for  the  serv- 
ices will  not  be  deductible  from  gross  income,  but  will 
be  treated  as  a  distribution  of  profits.  (T.  D.  2616; 
Reg.  33  Rev.,  Art.  8.) 

In  one  case  it  was  held  that  a  distribution  by  a  cor- 
poration of  10%  of  its  net  earnings  to  employees  in 
addition  to  their  regular  salaries  or  wages  was  a  proper 
deduction  from  gross  income  if  the  distribution  was 
made  for  services  actually  rendered  and  was  not  such 
a  distribution  of  profits  as  would  be  covered  by  the 
terms  "gratuity"  or  "free  bonus"  (Letter  from 
Treasury  Department  dated  November  12,  1917;  I.  T. 


710  HOLMES    INCOME    TAX   SUPPLEMENT 

S.  1917,  Paragraph  2481.)  A  profit  sharing  or  bonus 
payment,  however,  is  not  in  any  event  allowed  as  a 
deduction  if  the  amount  is  left  on  deposit  with  the 
company  to  secure  the  company  against  such  losses 
as  may  be  charged  to  the  employees.  (Letter  from 
Treasury  Department  dated  November  30,  1917.) 

[Page  317.]  jl 

Pensions.  No  deduction  shall  be  made  for  contri- 
butions to  a  pension  fund  the  resources  of  which  are 
held  by  the  corporation,  the  amount  deductible  in  such 
case  being  the  amount  actually  paid  to  the  employee. 
(Keg.  33  Rev.,  Art.  136.) 

[Page  318.] 

Farmers.  Amounts  expended  in  the  development  of 
orchards  and  ranches  prior  to  the  time  when  the  pro- 
ductive sta,ge  is  reached  are  considered  as  investments 
of  capital  and  are  not  deductible  as  expense.  (Reg.  33 
Rev.,  Art.  4.) 

CHAPTER  29 

DEDUCTION    OF    INTEREST 

[Page  323.] 

Accrued  Interest.  Corporations  keeping  books  of 
account  on  an  accrual  basis  may  deduct  accrued  in- 
terest for  the  year  whether  paid  or  not  when  shown 
as  a  charge  against  accrued  income  upon  the  books 
of  account.  (T.  D.  2625.) 

CHAPTER  31 

DEDUCTION  OP  LOSSES 

[Page  337.] 

Issue  of  Bonds  Below  Par.  Where  a  railroad  com- 
pany sold  bonds  and  equipment  notes  at  a  discount  in 


INCOME   TAX   RULINGS  711 

1906  and  the  books  show  that  the  loss  was  entirely 
charged  off  under  the  profit  and  loss  account  for  1906, 
and  the  company  in  making  returns  of  excise  tax  for 
the  years  1911  and  1912  failed  to  deduct  the  propor- 
tionate amount  of  discount  sustained,  it  has  no  right 
to  claim  refund  of  such  amount.  (Chicago  and  Alton 
Railroad  Company  v.  U.  S.  Court  of  Claims,  decided 
December  3,  1917 ;  D.  T.  2631.)  If  the  bonds  were  sold 
subsequent  to  January  1,  1909,  at  a  discount,  and  the 
amount  of  the  discount  was  then  charged  off  on  the 
books,  either  against  earnings  or  surplus,  but  not  de- 
ducted in  the  corporation's  return  of  net  income,  such 
discount  as  was  not  then  deducted  in  its  entirety,  may 
be  spread  over  the  life  of  the  bond,  and  an  aliquot 
part  of  the  discount  may  be  deducted  from  the  gross 
income  of  each  year  until  the  bonds  mature  or  are 
redeemed. 

In  cases  wherein  a  corporation  sells  its  bonds  at  a 
discount  plus  a  commission  for  selling  the  amount  of 
such  discount  and  commission,  together  with  other 
expenses  incidental  to  issuing  the  bonds,  constitutes 
a  loss,  the  aggregate  amount  of  which  loss  will,  for 
the  purpose  of  an  income  tax  return,  be  prorated  over 
the  life  of  the  bonds  sold,  and  the  amount  thus  ap- 
portioned to  each  year  will  be  deductible  from  the 
gross  income  of  each  such  year  until  the  bonds  shall 
have  been  redeemed. 

If  a  corporation  having  sold  its  bonds  at  a  discount, 
the  discount  having  been  deducted  from  gross  income 
later  repurchases  or  redeems  the  bonds  at  a  price  less 
than  par,  the  difference  between  the  price  at  which  they 
are  redeemed  and  their  par  value  will  be  returned  as 
income.     (Reg.  33  Rev.,  Art.  150.) 


712  HOLMES   INCOME   TAX   SUPPLEMENT 

[Page  339.] 
Loss  by  Destruction  or  Disappearance  of  Property. 

When  the  loss  is  claimed  through  the  destruction  of 
property  by  tire,  flood,  or  other  casualty  the  amount 
deductible  will  be  the  difference  between  the  value 
as  of  March  1,  1913,  or  the  cost  of  the  property  and 
the  salvage  value  thereof,  including  in  the  latter  value 
the  amount,  if  any,  that  has  been  or  should  have  been 
set  aside  and  deducted  in  the  current  or  previous  years 
from  gross  income  on  account  of  depreciation  and 
which  has  not  been  paid  out  in  making  good  the  de- 
preciation sustained.     (Reg.  33  Rev.,  Art.  147.) 

[Page  343.] 

When  Debts  May  be  Considered  Worthless.  Where 
an  indebtedness  is  claimed  and  contested  and  a  set- 
tlement is  had  by  way  of  compromise  whereby  an 
amount,  less  than  the  debt  claimed,  is  accepted  in  full 
payment  and  satisfaction  of  the  debt,  the  difference 
between  the  amount  paid  and  that  claimed  is  not  al- 
lowable as  a  deduction  for  bad  debts.  Where  the  set- 
tlement in  compromise  consists  of  a  promise  to  pay  an 
amount  less  than  the  debt  claimed,  the  amount  prom- 
ised to  be  paid  forms  the  basis  of  a  new  transaction, 
and  upon  failure  to  make  good  this  promise  the  ques- 
tion will  arise  as  to  the  deductibility  of  the  new  amount 
only. 

Where  all  of  the  surrounding  and  attendant  circum- 
stances indicate  that  a  debt  is  worthless  and  uncol- 
lectible and  that  legal  action  to  enforce  payment  would 
in  all  probability  not  result  in  the  satisfaction  of  ex- 
ecution on  a  judgment,  a  showing  of  these  facts  will 
be  sufficient  showing  of  the  worthlessness  of  the  debt 
for  purposes  of  deduction. 


INCOME    TAX    RULINGS  713 

Where,  under  foreclosure,  a  mortgagee  buys  in  the 
mortgaged  property  and  credits  the  indebtedness  with 
the  purchase  price  the  difference  between  purchase 
price  and  the  indebtedness  will  not  be  allowable  as  a 
deduction  for  bad  debt — the  property  which  was  se- 
curity for  the  debt  being  in  possession  and  owner- 
ship of  the  mortgagee  is,  for  the  purposes  of  income 
tax,  held  to  be  sufficient  to  justify  a  disallowance  of  a 
claim  for  bad  debt.  Only  where  purchaser  for  less  than 
debt  is  another  than  mortgagee  may  the  difference  be- 
tween debt  and  net  from  sale  credited  be  deducted  as 
bad  debt.     (Reg.  33  Rev.,  Art.  8.) 

It  is  not  essential  that  the  bad  debt  or  account  shall 
be  proved  worthless  by  legal  proceedings  before  the 
deduction  may  be  allowed  but  the  corporation  must 
not  only  be  satisfied  that  the  debt  or  account  is  worth- 
less, but  must  be  able  to  satisfy  the  Commissioner  or 
Collector  of  Internal  Revenue  that  the  accounts  charged 
off  were  definitely  determined  at  the  time  to  be  worth- 
less and  that  they  had  not  been  recognized  as  worthless 
or  without  value  prior  to  the  beginning  of  the  year 
for  which  the  return  is  made.    (Reg.  33  Rev.,  Art.  151.) 

[Page  344.] 

Loss  Due  to  Adverse  Judgment.  Amounts  paid  pur- 
suant to  judgment  or  otherwise  on  account  of  damages 
are  deductible  from  gross  income  in  the  year  and  to  the 
extent  such  amounts  are  actually  paid,  less  any  amount 
of  such  damages  as  may  have  been  compensated  for 
by  insurance.  (Reg.  33  Rev.,  Art.  158.)  If  on  suit 
for  damages  the  amount  recovered  is  less  than  the 
damage  sustained  or  less  than  an  amount  necessary 
to  make  good  the  damage  the  difference  between  the 
actual    amount  of  damage  sustained   and   tho   amount 


714  HOLMES    INCOME   TAX   SUPPLEMENT 

recovered  will  be  deductible  as  a  loss.     (Reg.  33  Rev., 
Art.  94.) 

[Page  345.] 

Cost  of  Drawings,  Models  and  Patterns.  Expendi- 
tures made  for  designs,  drawings,  patterns  or  models 
representing  work  of  an  experimental  nature  should 
be  treated  as  a  capital  disbursement  and  not  as  an 
expenditure  if  the  designs,  drawings,  patterns  or  mod- 
els prove  to  be  satisfactory  and  result  in  the  produc- 
tion of  salable  goods.  If,  however,  they  prove  to  be 
unsatisfactory  and  have  no  asset  value,  the  expendi- 
ture may  be  charged  off  as  a  loss  incident  to  running 
the  business  and  as  such  deducted  from  gross  income, 
provided  that  the  taxpayer  is  taking  credit  for  such 
expenditures  in  the  income  tax  return  makes  a  full 
and  complete  explanation  with  respect  to  the  same  and 
to  the  satisfaction  of  the  Commissioner  of  Internal 
Revenue.     (Reg.  33  Rev.,  Arts.  175  and  176.) 

If  designs,  drawings,  patterns,  or  models  result  in 
the  production  of  goods  which  prove  to  be  salable  for 
a  certain  length  of  time  and  then  become  obsolete  and 
can  not  be  sold,  the  amount  expended  for  such  de- 
signs, drawings,  patterns,  or  models,  less  any  amounts 
previously  claimed  as  depreciation  with  respect  to  the 
.same  or  as  a  return  of  capital,  may  when  charged  off, 
be  included  in,  and  deducted  as  a  loss  incident  to  run- 
ning the  business,  provided  full  and  complete  infor- 
mation is  reported  in  a  manner  satisfactory  to  the 
Commissioner  of  Internal  Revenue.  (Reg.  33  Rev., 
Art.  177.) 

Obsolescence  Deductible,  Cost  Less  Depreciation 
and  Salvage.  Amounts  representing  losses  on  account 
of  obsolescence  of  physical  property  may  be  included 


INCOME   TAX    RULINGS  715 

as  a  deduction  from  gross  income  as  a  loss,  provided 
such  amounts  have  been  recorded  in  the  books  fol- 
lowing the  condemnation  and  withdrawal  from  use  of 
the  obsolete  property.  The  amount  of  obsolescence 
that  may  be  claimed  as  a  deduction  shall  be  ascer- 
tained by  deducting  from  the  cost  of  the  property 
the  total  amount  that  has  been  previously  claimed  and 
deducted  on  account  of  the  depreciation  of  the  prop- 
erty, plus  residual  value  at  time  of  obsolescence,  or 
plus  the  amount  received  from  the  sale  of  the  prop- 
erty. The  obsolescence  deduction  must  not  include 
the  accumulated  depreciation  applicable  to  prior 
years.     (Reg.  33  Rev.,  Art.  178.) 

Obsolescence  When  no  Depreciation  is  Deducted.  If 
no  depreciation  has  been  charged  off  against  such 
property  and  deducted  from  gross  income  of  prior 
years,  the  amount  allowable  as  a  deduction  for  the 
year  in  which  the  property  becomes  obsolete  shall  be 
ascertained  by  deducting  .from  the  cost  of  the  prop- 
erty its  residual  value  plus  an  amount  equal  to  the 
depreciation  actually  sustained  during  the  prior  period 
and  which  might  have  been  deducted  when  computed 
at  the  rate  applicable  to  the  same  or  similar  property. 
The  amount  of  depreciation  thus  arrived  at  as  appli- 
cable to  former  years  may  be  made  the  basis  of  amended 
returns  and  a  claim  for  the  refund  of  taxes  overpaid 
by  reason  of  the  fact  that  no  depreciation  deduction 
was  claimed  in  those  years.    (Reg.  33  Rev.,  Art.  179.) 

Loss  on  Inventory  by  Obsolescence  or  Damage.  No 
deductions  from  the  inventory  value  of  merchandise 
or  material  will  be  allowed  except  in  eases  in  which 
the  inventory  includes  goods  or  materials  which  by 
reason  of  obsolescence  or  damage  are  unsalable.  When 
such  deduction  is  claimed  the  facts  connected  there- 


716  HOLMES    INCOME   TAX   SUPPLEMENT 

with,  including  a  statement  of  the  cost  of  the  goods, 
the  value  at  which  they  were  inventoried,  and  their 
present  condition,  must  be  filed  with  the  return.  (Reg. 
33  Rev.,  Art.  160.) 


CHAPTER  32 

DEDUCTION  FOR  ALLOWANCE  FOR  DEPRECIATION 

[Page  348.] 

Merchandise.  Depreciation  computed  on  total  in- 
voice cost  of  merchandise  in  stock  is  not  an  allow- 
able deduction,  except  that  if  any  portion  of  the  mer- 
chandise in  stock  is  unsalable  by  reason  of  obsolescence 
or  damage,  a  depreciation  deduction  not  in  excess  of 
the  decline  in  value  during  the  taxable  year  will  be 
allowed.     (Reg.  33  Rev.,  Art.  169.) 

[Page  355.] 

Rate  of  Depreciation.  If  it  develops  that  by  reason 
of  underestimating  the  life  of  the  property  or  by 
overestimating  the  rate  of  deterioration  an  amount 
in  excess  of  the  yearly  depreciation  has  been  taken, 
the  rate  applicable  to  future  years  should  at  once  be 
reduced  and  the  balance  of  the  cost  of  the  property 
not  provided  for  through  a  depreciation  reserve  should 
be  spread  over  the  estimated  remaining  life  of  the 
property.     (Reg.  33  Rev.,  Art.  165.) 

[Page  355.] 

Annual  Allowance  Must  be  Entered  on  Books.  With- 
in the  purview  of  this  item  depreciation,  to  an  amount 
measuring  the  decline  in  value  due  to  exhaustion,  wear 
and  tear  of  property  arising  out  of  its  use,  is  a  loss. 


ixco.mi:  tax   rulings  717 

This  loss,  in  order  to  constitute  an  allowable  deduc- 
tion from  gross  income,  must  be  charged  off.  The  par- 
ticular manner  in  which  the  amount  shall  be  charged 
off  is  not  material,  except  that  the  amount  measuring 
a  reasonable  allowance  for  depreciation  must  be  either 
« I  rd acted  directly  from  the  book  value  of  the  assets  or 
credited  to  a  depreciation  reserve  account,  and  as  such 
shall  be  reflected  in  the  annual  balance  sheet.  (Beg 
33  Rev.,  Art.  159.) 


B  - 


[Page  358.] 

Diversion  of  Fund.  If  a  corporation  at  the  end  of 
the  year  finds  it  has  a  certain  net  income,  and,  without 
making  any  provision  for  depreciation,  distributes  such 
net  income  among  its  stockholders  as  dividends,  it  will 
be  estopped  from  claiming  in  its  returns  of  annual  net 
income  for  such  year  any  deduction  on  account  of  de- 
preciation unless  it  is  shown  conclusively  that  the  prop- 
erty account  has  been  reduced  by  the  amount  of  de- 
preciation claimed,  or  unless  such  amount  has  been 
credited  to  a  depreciation  reserve  account,  and  such 
amount  was  in  fact  a  reasonable  allowance. 

The  depreciation  allowance  authorized  by  section 
12  is  intended  to  provide  a  fund  out  of  which  the  loss 
due  to  use,  wear,  and  tear  may  be  made  good,  and  the 
fund  thus  created  can  not  be  diverted  to  the  payment 
of  dividends ;  that  is  to  say,  a  deduction  made  under 
the  guise  of  depreciation  can  not  measure  a  loss  and 
at  the  same  time  be  used  in  the  payment  of  dividends. 

The  fact  that  no  reserve  was  made  for  depreciation 
indicates  that  there  is  no  loss  on  this  account  to  he 
provided  for.     (Reg.  33  Rev..  Art.  161.) 


718  HOLMES   INCOME    TAX   SUPPLEMENT 

CHAPTER  33 

DEDUCTION    OF    ALLOWANCE    FOR    DEPLETION   OF    OIL 
AND   GAS   DEPOSITS 

The  rulings  relating  to  depletion  of  oil  and  gas  de- 
posits have  been  very  materially  changed.  Under  the 
new  rulings  depletion  is  allowed  to  lessees  as  well  as 
owners  in  fee  and  the  amount  of  the  annual  allowance 
may  be  measured  by  the  number  of  units  removed  from 
the  deposit  instead  of  by  the  reduction  in  flow  and 
production.  Regulations  33  Revised,  Articles  170  to 
172  inclusive,  are  in  full  as  follows : 

Art.  170.  Oil  and  Gas  Properties. — Sections  5  and  12 
of  the  act  of  September  8,  1916,  as  amended  by  the  act 
of  October  3,  1917,  authorize  individuals  and  corporations 
owning  and  operating  gas  or  oil  properties,  to  deduct 
from  gross  income — 

"A  reasonable  allowance  *  *  *  for  actual  re- 
duction in  flow  and  production,  *  *  *  provided 
that  when  the  allowance  authorized  *  *  *  shall  equal 
the  capital  originally  invested,  or  in  case  of  purchase 
made  prior  to  March  1,  1913,  the  fair  market  value  as  of 
that  date,  no  further  allowance  shall  be  made." 

The  essence  of  this  provision  of  law  is  that  the  owner 
or  operator  of  this  character  of  properties  shall  secure 
through  an  aggregate  of  annual  depletion  deductions,  the 
return  of  the  amount  of  capital  actually  invested,  or  an 
amount  not  in  excess  of  the  fair  market  value  as  of  March 
1,  1913,  of  the  properties  owned  prior  to  that  date. 

For  the  purpose  of  determining  the  amount  of  capital 
to  be  returned  through  annual  deductions,  operators  may 
be  divided  into  two  classes,  (a)  operators  who  own  the 
fee,  and  (&)  operators  who  own  a  lease  or  leases. 

In  the  case  of  the  operating  fee  owner,  the  amount 


INCOME    TAX   RULINGS  719 

returnable  through  depletion  deductions  is  the  fair  mar- 
ket value  of  the  property  (exclusive  of  the  cost  of  physi- 
cal property)  as  of  March  1,  1913,  if  acquired  prior  to 
that  date,  or  the  actual  cost  of  the  property  if  acquired 
subsequent  to  that  dale,  plus,  in  either  case,  the  cost  of 
velopment  (other  than  the  cost  of  physical  property  inci- 
dent to  such  development)  up  to  the  point  at  which  the 
income  from  the  developed  territory  equals  or  exceeds 
1  lie  deductible  expenses. 

In  the  case  of  a  lessee,  the  capital  thus  to  be  returned 
is  the  amount  paid  in  cash  or  its  equivalent  as  a  bonus 
or  otherwise  by  the  lessee  for  the  lease,  plus  also  all  ex- 
penses incurred  in  developing  the  property  (exclusive  of 
physical  property  (prior  to  the  receipt  of  income  there- 
from sufficient  to  meet  all  deductible  expenses,  after 
which  time  as  to  both  owner  and  lessee,  such  incidental 
expenses  as  are  paid  for  wages,  fuel,  repairs,  hauling, 
etc.,  in  connection  with  the  drilling  of  wells  and  further 
development  of  the  property,  may,  at  the  option  of  the 
operator,  be  deducted  as  an  operating  expense  or  charged 
to  capital  account. 

If,  in  exercising  this  option,  the  individual  or  corpora- 
tion charges  the  expense  of  drilling  wells  or  further  de- 
\ilopinont  to  capital  account,  the  same,  in  so  far  as  such 
expense  is  represented  by  physical  property,  may  be 
taken  into  account  in  determining  a  reasonable  allowance 
for  depreciation  during  each  year  until  the  property 
account  thus  augmented  has  been  extinguished  through 
annual  depreciation  deductions,  after  which  no  further 
deduction  on  this  account  will  be  allowed.  In  the  case  of 
a  going  or  producing  business,  the  cost  of  drilling  non- 
productive wells  may  be  deducted  from  gross  income  as 
an  operating  expense. 


720  HOLMES   INCOME   TAX   SUPPLEMENT 

Estimate  of  Probable  Resources.  In  the  case  of 
either  an  owner  or  lessee  it  will  be  required  that  an 
estimate,  subject  to  the  approval  of  the  Commissioner  of 
Internal  Revenue,  shall  be  made  of  the  probable  quantity 
of  oil  or  gas  contained  in  or  to  be  recovered  from  the 
territory  with  respect  to  which  the  investment  is  made. 
The  invested  capital  (value  as  of  Mar.  1,  1913,  or  cost, 
if  acquired  subsequent  to  that  date,  plus  the  cost  of  de- 
velopment, other  than  cost  of  physical  property,  up  to 
the  point  of  expense-paying  production,  in  the  case  of  an 
owner,  and  the  amount  actualy  paid  for  the  lease  plus 
cost  of  development,  other  than  cost  of  physical  property, 
np  to  the  same  point,  in  the  case  of  a  lessee)  will  be 
divided  by  the  number  of  units  of  oil  or  gas  so  estimated 
to  be  contained  in  or  to  be  recovered  from  the  territory, 
and  the  quotient  will  be  the  per  unit  cost  or  amount  of 
capital  invested  in  each  unit  recoverable.  This  quotient, 
or  per  unit  cost,  when  multiplied  by  the  number  of  units 
removed  from  the  territory  during  any  one  year,  will 
determine  the  amount  which  may  be  allowably  deducted 
from  the  gross  income  of  that  year  on  account  of  deple- 
tion of  assets  or  as  a  return  of  invested  capital  until  the 
total  of  such  deductions  shall  equal  the  capital  invested. 

Every  individual  or  corporation  entitled  to  a  deduction 
on  account  of  the  depletion  of  the  property  under  opera- 
tion or  for  a  return  of  the  capital  invested  with  respect 
to  the  same  shall  keep  an  accurate  ledger  account,  in 
which,  in  the  case  of  fee  owner,  shall  be  charged  the  fair 
market  value  as  of  March  1,  1913,  or  the  cost,  if  acquired 
subsequent  to  that  date,  of  the  oil  or  gas  property,  plus 
cost  of  development  as  hereinbefore  defined,  or,  in 
the  case  of  a  lessee,  the  amount  actually  originally  in- 
vested in  the  lease  and  its  development.  This  account 
shall  be  credited  with  the  amount  claimed  and  allowed 


INCOME   TAX    RULINGS  721 

each  year  as  a  deduction  on  account  of  depletion  or  as 
a  return  of  capital,  to  the  end  that  when  the  credits  to 
the  account  equal  the  debits  no  further  deduction  on 

either  account,  with  respect  to  this  property  and  the 
capital  invested  therein,  will  be  allowed.  Or,  in  lieu  oi" 
a  direct  credit  to  property  account,  the  amount  so  claimed 
and  allowed  as  a  deduction  may  be  credited  to  a  deple- 
tion reserve  account, 

Where  Resources  Are  Uncertain.  If  for  any  reason 
the  quantity  of  oil  or  gas  in  the  property  can  not  be  deter- 
mined with  any  degree  of  certainty,  the  depletion  deduc- 
tion will  be  computed  in  accordance  with  the  rule  set  out 
in  Treasury  Decision  2447,  except  that  lessees  may  com- 
pute their  deduction  for  return  of  capital  (cost  of  lease 
and  development)  in  the  same  manner  as  owners  in  fee; 
that  is,  they  may  extinguish  such  capital  on  the  basis  of 
the  reduction  in  flow  and  production  as  compared  with 
Hie  preceding  year,  or,  in  the  case  of  leasehold  properties 
brought  in  or  developed  during  the  year,  the  depletion 
deduction  may  be  computed  on  the  basis  of  the  decline 
in  settled  flow  and  production,  as  evidenced  by  tests  and 
gauges  made  at  the  end  of  the  year  as  compared  with 
similar  tests  and  gauges  made  at  the  time  the  settled  flow 
was  determined. 

For  the  purpose  of  computing  the  depletion  the  terri- 
tory comprehended  in  a  given  lease  will  be  considered  the 
unit  with  respect  to  which  the  depletion  deduction  may 
be  claimed  and  allowed. 

If  the  operator  is  the  owner  of  the  fee  the  value  de- 
termined and  set  up  as  of  March  1,  1913,  or  the  cost  of 
the  property  if  acquired  subsequent  to  that  date.  or.  if 
the  operator  is  a  lessee,  the  amount  actually  paid  for  the 
lease,  plus,  in  the  case  of  both  owner  and  lessee,  the  cost 
of  subsequent  development,  exclusive  of  physical  prop- 


722  HOLMES   INCOME   TAX  SUPPLEMENT 

erty,  if  such  cost  is  capitalized,  will  be  the  basis  for  de- 
termining the  depletion  deduction  or  the  deduction  for 
return  of  capital  for  all  subsequent  years  during  the  con- 
tinuance of  the  ownership  under  which  the  value  was 
fixed  or  by  which  the  investment  was  made,  and  during 
such  ownership  there  can  be  no  revaluation  for  the  pur- 
pose of  this  deduction  if  it  should  be  found  that  the 
quantity  of  oil  or  gas  in  the  property  was  underestimated 
at  the  time  the  value  was  fixed  or  the  property  was 
acquired,  or  at  the  time  the  lease  contract  was  entered 
into  or  purchased. 

This  rule  will  not,  however,  be  so  construed  as  to  forbid 
an  operator  from  redistributing,  the  invested  capital  over 
the  estimated  number  of  units  remaining  in  the  territory 
under  operation  if  a  subsequent  increase  of  invested  cap- 
ital should  render  this  necessary  in  order  to  determine 
the  amount  of  such  capital  applicable  to  each  unit,  pro- 
vided that  when  such  redistribution  is  made  the  total  cap- 
ital invested  will  be  reduced  by  the  amount  previously 
charged  off  and  deducted  on  account  of  depletion  or  as 
a  return  of  capital. 

Additional  Depreciation  for  Machinery,  Etc.  Both 
owners  and  lessees  operating  oil  or  gas  properties  will, 
in  addition  to  and  separate  from  the  deduction  allowable 
for  the  depletion  or  return  of  capital  as  hereinbefore 
provided  for,  be  permitted  to  deduct  a  reasonable  allow- 
ance for  depreciation  of  physical  property,  such  as 
machinery,  tools,  equipment,  pipes,  etc.  the  amount  de- 
ductible upon  this  account  to  be  such  an  amount,  based 
upon  its  capitalized  value  (cost)  equitably  distributed 
over  its  useful  life,  as  will  bring  it  to  its  true  salvage 
value  when  no  longer  useful  for  the  purpose  for  which 
such  property  was  acquired. 

As  to  both  fee  owner  and  lessee,  the  capital  invested 


INCOME   TAX    RULINGS  725 

in  physical  property,  upon  which  the  depreciation  deduc 
lion  is  computed,  should  be  segregated  in  the  books  of 
account  from  thai  invested  in  the  oil  or  gas  territory  or 
in  the  lease  or  Leases,  with  respect  to  which  the  deduction 
for  depletion  or  return  of  capital  is  claimed,  and  credits 
for  depreciation  may  be  made  in  the  same  manner  as 
hereinbefore  provided  for  depletion. 

Statement  Required.  To  each  return  made  by  an 
individual  or  corporation  owning  and  operating  oil  or 
gas  properties  there  should  be  attached  a  statement 
showing — 

(1)  (a)  The  fair  market  value  of  the  property  (ex- 
clusive of  machinery,  equipment,  etc.)   as  of  March  1, 
1913,  if  acquired  prior  to  that  date,  or  (6)   the  actual 
•est  of  the  property  if  acquired  subsequent  to  that  date; 

(2)  How  the  fair  market  value  as  of  -March  1,  L913, 
was  ascertained; 

(3)  The  estimated  quantity  of  oil  or  gas  in  the  sand 
at  the  time  the  value  or  cost  was  determined; 

(4)  Amount  of  capital  applicable  to  each  unit; 

(5)  The  quantity  of  oil  or  gas  produced  during  the 
year  for  which  the  return  is  made; 

(6)  Any  oilier  data  which  would  be  helpful  in  deter- 
mining the  reasonableness  of  the  depletion  deduction. 

If  the  operator  is  a  lessee  that  fact  should  lie  stated, 
and  to  the  return  made  by  such  lessee  there  should  be 
attached  a  statement  showing — 

(1)  The  amount  of  cash  or  its  equivalent  actually  paid 
I'm-  the  lease; 

■_!  The  amount  expended  for  development  prior  to 
the  receipt  of  income  from  the  output,  sufficient  to  pay 
operating  expenses-. 

(3)  The  total  capital  thus  invested  ; 

P.  1.  Tax  Supp.— 5 


724  HOLMES   INCOME   TAX   SUPPLEMENT 

(4)  The  estimated  quantity  of  oil  or  gas  in  the  terri- 
tory  comprised  in  the  lease; 

(5)  The  amount  of  capital  applicable  to  each  unit; 

(6)  The  number  of  units  removed  during  the  year 
for  which  the  return  is  made  and  other  data  that  would 
be  helpful  in  determining  whether  or  not  the  deduction 
made  for  the  return  of  capital  is  a  reasonable  allowance. 

Art.  171.  Mining  Corporations.  —  Paragraphs 
"seventh"  and  "eighth"  of  section  5  (a)  and  paragraph 
"second"  of  section  12  (a)  of  Title  I  of  the  act  of  Sep- 
tember 8,  1916,  authorize  individuals  and  corporations 
to  deduct  from  gross  income  ' '  a  reasonable  allowance  for 
exhaustion,  wear  and  tear  of  property,  and  *  * 
(b)  in  the  case  of  mines,  a  reasonable  allowance  for  deple- 
tion thereof  not  to  exceed  the  market  value  in  the  mine 
of  the  product  thereof  which  has  been  mined  and  sold 
during  the  year  for  which  the  return  and  computation 
are  made ; ' '  provided,  that  when  the  sum  of  the  annual 
allowances  for  depletion  equals  the  capital  originally  in- 
vested, or  in  case  of  purchase  prior  to  March  1,  1913,  the 
fair  market  value  as  of  that  date  of  the  mineral  "in 
place,"  no  further  allowance  on  this  account  shall  be 
made. 

Ownership  of  the  mine  content  at  the  time  for  which 
computation  is  made  is  an  essential  prerequisite  to  an 
allowable  deduction  for  depletion. 

The  deduction  in  the  case  of  a  lessee  will  be  limited  to 
an  amount  equal  to  the  capital  actually  invested  in  the 
lease,  without  regard  to  value  as  of  March  1,  1913,  or 
any  other  date. 

The  paragraphs  of  the  title  above  referred  to  author- 
izes in  the  case  of  mine  owners  two  classes  of  deductions 
to  take  care  of  the  wasting  of  assets,  namely,  (a)  depre- 
ciation, (b)  depletion. 


INCOME   TAX   RULINGS  725 

Art.  172.  Deductions  and  Valuation. — If  the  property 
was  acquired  by  purchase  or  otherwise  (other  than  by 
lease)  prior  to  March  1,  1913,  the  amount  of  invested 
capital  which  may  be  extinguished  through  annual  deple- 
tion deductions  from  gross  income  will  be  the  fair  market 
value  of  the  mine  property  so  acquired,  as  of  March  1, 
1913.  The  value  contemplated  herein  as  the  basis  for 
depletion  deductions  authorized  by  this  title  must  not  be 
based  upon  the  assumed  salable  value  of  the  output  under 
current  operative  conditions,  less  cost  of  production,  for 
the  reason  that  the  value  so  determined  would  compre- 
hend the  profits  to  be  realized  from  operation  of  'li" 
property. 

Neither  must  the  value  determined  as  of  March  1,  1913, 
be  speculative,  but  must  be  determined  upon  the  basis  of 
t lie  salable  value  en  bloc  as  of  that  date  of  the  entire 
deposit  of  minerals  contained  in  the  property  owned,  ex- 
clusive of  the  improvements  and  development  work;  that 
is,  the  price  at  which  the  natural  deposits  or  mineral 
property  as  an  entirety  in  its  then  condition  could  have 
been  disposed  of  for  cash  or  its  equivalent, 

The  en  bloc  value  having  been  thus  ascertained,  an 
estimate  of  the  number  of  units  (tons,  pounds,  etc.) 
should  be  made.  The  en  bloc  value  divided  by  the  esti- 
mated number  of  units  in  the  property  will  determine  the 
per  unit  value,  or  amount  of  capital  applicable  to  each 
unit,  which,  multiplied  by  the  number  of  units  mined  and 
sold  during  any  one  year,  will  determine  the  sum  which 
will  constitute  an  alloAvable  deduction  from  the  gross  in- 
come of  that  year  on  account  of  depletion. 

Deduction  computed  on  a  like  basis  may  be  made  from 
year  to  year  during  the  ownership  under  which  the  value 
was  determined,  until  the  aggregate  en  bloc  value  as  of 
March   1.   191^.   of  the  mine  or   mineral   deposits  shall 


726  HOLMES   INCOME   TAX   SUPPLEMENT 

have  been  extinguished,  after  which  no  further  deduction 
on  account  of  depletion  with  respect  to  this  property  will 
be  allowed  to  the  individual  or  corporation  under  whose 
ownership  the  en  bloc  value  was  determined. 

Fair  Market  Value,  March  1,  1913.  The  precise  de- 
tailed manner  in  which  the  estimated  fair  market  value 
of  mineral  deposits  as  of  March  1,  1913,  shall  be  made 
must  naturally  be  determined  by  each  individual  or  cor- 
poration interested,  and  who  is  the  owner  thereof,  upon 
such  basis  as  must  not  comprehend  any  operating  profits, 
tiie  estimate  in  all  cases  to  be  subject  to  the  approval  of 
the  Commissioner  of  Internal  Revenue. 

In  any  case  in  which  a  corporation  uses  for  purposes 
of  its  income  return  an  estimate  of  the  value  of  mines 
or  of  mineral  lands  or  properties  as  of  March  1,  1913, 
as  the  basis  of  computing  amounts  to  be  deducted  for 
depletion  or  return  of  capital,  this  department  in  pass- 
ing upon  the  accuracy  and  fairness  of  such  estimate  will 
attach  due  weight  to  the  market  value  of  the  stock  of  the 
corporation  on  March  1,  1913,  and  also  to  sworn  state- 
ments as  to  the  value  of  capital  stock  of  the  corporation 
filed  at  any  time  thereafter  for  purposes  of  the  special 
excise  tax  on  corporations  based  on  value  of  their  capital 
stocks  imposed  by  Title  TV  of  the  Act  of  September  8, 
1916. 

In  any  case  in  which  any  depletion  deduction  is  com- 
puter! on  the  basis  of  the  cost  or  price  at  which  any  mine, 
mineral  lands  or  properties  were  acquired,  the  corpora- 
lion  will  be  required  upon  request  of  the  Commissioner 
of  Internal  Revenue  to  show  that  the  cost  or  price  at 
which  the  property  was  bought  was  fixed  for  purposes  of 
a  bona  fide  purchase  or  sale  by  which  the  property  passed 
to  an  owner  in  fact  as  well  as  in  form,  different  from  the 
vendor.    No  fictitious  or  inflated  cost  or  price  will  be  per- 


INCOME   TAX    BULINGS  Tit 

mitted  to  form  the  basis  of  any  calculation  of  a  depict  ion 
deduction,  and  in  determining  whether  or  not  the  price 
or  cost  at  which  any  purchase  or  sale  was  made  repre- 
sented the  actual  market  value  of  the  property  sold  due 
weight  will  be  given  to  the  relationship  or  connection 
existing  between  the  party  or  parties  selling  the  proper!  \ 
;iik1  the  buyer  thereof. 

Records  to  be  Kept.  Every  individual  or  corporation 
claiming  and  making  a  deduction  for  depletion  of  natural 
deposits  shall  keep  an  accurate  ledger  account,  in  which 
shall  be  charged  the  fair  market  value  as  of  March  1, 
1013,  or  the  cost,  if  the  property  was  acquired  subsequent 
to  that  date,  of  the  mineral  deposits  involved.  This  ac- 
count shall  be  credited  with  the  amount  of  the  depletion 
deduction  claimed  and  allowed  each  year,  or  the  amount 
of  the  depletion  shall  be  credited  to  a  depletion  reserve 
account,  to  the  end  that  when  the  sum  of  the  credits  for 
depletion  equals  the  value  or  cost  of  the  property  no 
further  deduction  for  depletion  with  respect  to  this  prop- 
erty will  be  allowed.  The  value  determined  and  set  up  as 
of  March  1,  1913,  or  the  cost  of  the  property  if  acquired 
subsequent  to  that  date  will  be  the  basis  for  determining 
the  depletion  deduction  for  all  subsequent  years  during 
the  ownership  under  which  the  value  was  fixed,  and 
during  such  ownership  there  can  be  no  revaluation  for 
the  purpose  of  this  deduction  if  it  should  be  found  that 
the  estimated  quantity  of  the  mineral  deposit  was  under- 
stated at  the  time  the  value  was  fixed  or  at  the  time  the 
property  was  acquired. 

Tn  cases  wherein  the  quantity  of  the  mineral  deposit 
in  the  mine  prior  to  March  1.  1013,  can  not  be  estimated 
with  any  degree  of  accuracy,  it  will  be  necessary,  if 
depletion  deductions  are  to  be  taken,  for  the  individual 
or  corporation  owning  the  deposits,  with  the  best  in  for- 


12$  HOLMES   INCOME    TAX   SUPPLEMENT 

uiation  available,  to  arrive  at  the  fair  market  value  of  the 
property  as  of  March  1,  1913 ;  that  is,  its  fair  cash  value 
en  bloc,  if  such  value  is  believed  to  be  other  than  its 
original  cost,  which  value,  during  the  period  of  the  owner- 
ship under  which  it  was  determined,  shall  be  final  and 
shall  be  charged  to  the  property  account  as  hereinbefore 
indicated,  and  then,  on  the  basis  of  the  most  probable 
number  of  units  in  the  property,  the  per  unit  value  shall 
be  determined  as  the  basis  for  computing  annual  deple- 
tion allowances,  this  method  and  allowances  to  be  con 
tinued  until,  but  not  beyond,  the  time  when  the  value  .is 
of  March  1,  1913,  shall  have  been  extinguished. 

When  to  Use  Original  Cost  Basis.  The  original  cost 
of  the  mineral  deposit  may  be  taken  as  the  basis  for 
computing  annual  depletion  deductions  if  the  fair  market 
value  as  of  March  1,  1913,  as  hereinbefore  required,  can 
not  be  ascertained  otherwise,  allowance  being  made  for 
minerals  which  may  have  been  removed  prior  to  that  date. 

In  cases  wherein  a  mineral  property  was  acquired  sub- 
sequent to  March  1, 1913,  the  same  rule  for  computing  the 
annual  depletion  deduction  will  apply,  except  that  in 
such  case  the  basis  of  the  computation  will  be  the  actual 
cost  rather  than  the  value  as  of  March  1,  1913. 

A  lessee  corporation  is  not  entitled  to  any  depletion 
deduction  as  such,  but  if  such  lessee,  in  addition  to  royal- 
ties, pays  a  stipulated  sum  for  the  right  to  explore, 
develop,  and  operate  a  mine,  such  sum  may  be  spread  rat- 
ably over  the  estimated  number  of  units  in  the  mine,  to 
thus  ascertain  the  amount  of  invested  capital  or  bonus 
payment  applicable  to  each  unit.  The  per  unit  cost  thus 
ascertained  will  be  multiplied  by  the  number  of  units 
removed  from  the  mine  during  any  one  year  and  the  re- 
sult will  be  the  amount  that  may  be  deducted  from  the 
gross  income  of  that  year  as  a  return  of  the  capital  h  - 


INCOME   T\\    RULINI  729 

nested,  in  the  case  oi'  both  mine  owner  and  Lessee  no 
deduction  for  depletion  or  return  of  capita]  will  In- 
allowed  when  the  invested  capital  has  through  the  aggre- 
gate of  all  such  deductions  been  extinguished. 

Lessee's  Computation  of  Invested  Capital.  For  the 
purpose  of  computing  this  deduction  in  the  ease  of  a 
lessee  company,  the  actual  amount  of  the  bonus  payment 
and  not  a  value  as  of  March  1,  1913,  will  be  considered 
the  invested  capital  to  be  returned  through  the  aggregate 
of  the  annual  deductions. 

To  the  return  made  pursuant  to  the  above  rule  there 
should  be  attached  a  statement  setting  out  (1)  whether 
the  operator  is  a  fee  owner  or  lessee;  (2)  in  the  case  of 
a  fee  owner  (a)  the  fair  market  value  of  the  mineral 
deposits  as  of  March  1,  1913,  if  the  property  was  acquired 
prior  to  that  date,  (b)  the  cost  of  the  mineral  property 
if  acquired  subsequent  to  that  date;  (3)  the  method  by 
which  the  value  as  of  March  1,  1913,  was  determined,  in 
ease  the  property  was  acquired  prior  to  that  date;  (4) 
the  estimated  quantity  in  units  in  the  mine  as  of  March 
1,  1913,  or  at  the  date  of  purchase  if  acquired  subsequent 
to  that  date;  (5)  amount  of  capital  applicable  to  each 
unit;  (6)  the  number  of  units  removed  and  sold  during 
the  year  for  which  the  return  was  made;  and  (7)  any 
other  data  which  would  be  helpful  in  determining  the 
reasonableness  of  the  depletion  deduction  claimed  in  the 
return. 

Tn  the  case  of  a  lessee,  the  statement  should  show  (a) 
the  amount  of  the  bonus  or  other  payment  made  for  the 
right  to  operate  the  mine;  (b)  the  period  covered  by 
the  lease,  and  the  estimated  quantity  of  units  in  the  mine 
when  the  lease  contract  was  entered  into. 

In  addition  to  the  deduction  hereinbefore  provided 
Tor.  the  operator  will  be  permitted  to  deduct  from  the 


730  HOLMES   INCOME   TAX   SUPPLEMENT 

gross  income  of  each  year  a  reasonable  allowance  for 
depreciation  of  all  physical  property  used  in  connection 
with  the  operation  of  the  mine,  and  owned  by  the  opera- 
tor. For  this  purpose  the  actual  cost  (not  value)  will  be 
equitably  distributed  over  1  he  useful  life  of  such  property 
until  the  true  salvage  value  lias  been  reached. 

Both  owner  and  lessee  will  keep  accurate  ledger 
accounts  to  which  will  be  charged  the  capital  invested  in 
the  mine  or  lease  and  in  machinery,  equipment,  etc., 
crediting  such  accounts  or  a  depletion  and  depreciation 
reserve  account,  with  the  amount  claimed  and  allowed 
as  a  deduction  each  year  until  as  a  result  of  such  credits 
the  capital  charge  shall  be  extinguished,  after  which  no 
further  deduction  on  these  accounts  will  be  allowed. 


CHAPTER  34 

DEDUCTION  OP  ALLOWANCE  FOR  DEPLETION  OP  MINES 

In  the  new  regulations  the  subject  of  depletion  of 
mines  is  treated  together  with  the  subject  of  deple- 
tion of  oil  and  gas  wells.  The  regulations  are  printed 
in  full  on  pages  724  to  729  in  this  supplement. 


CHAPTER  35 

RETURN  OP  ANNUAL  NET  INCOME 

[Page  382.] 

By  Whom  Filed.  Returns  are  required  of  all  unmar- 
ried persons  of  lawful  age  having  a  net  income  of  $1,000 
or  over.  And  of  all  married  persons  having  a  net  income 
of  $2,000  or  over.  Heads  of  families  who  are  married 
will  be  required  to  make  returns  of  income  when  having 


[NCOME   TAX    RULINGS  73] 

a  uel  income  of  $2,000  or  over.  Heads  of  families  who 
are  unmarried  will  be  required  to  make  returns  of  in- 
come when  having  a  net  income  of  $1,000  or  over,  though 
the  basic  exemption  which  may  be  claimed  in  a  return  of 

income  will  be  $2,000.  Under  the  Act  of  September  8, 
1916,  as  amended,  the  Act  of  October  3,  1917,  returns 
will  be  required  in  the  case  of  net  incomes  equal  in  or 
in  excess  of  $1,000  or  $2,000,  according  to  the  marital 
status  (>r  the  person  making  the  return.  I  Reg.  '■'>'■'•  Rev., 
Art.  26.) 

[Page  383.] 

Husband  and  Wife.  Where  husband  and  wife  file 
separate  returns  of  income,  one  of  them  being  filed  in 
lime  and  the  other  deliniquent,  such  returns  arc  not 
supplemental  of  each  other  and  delinquency  must  be 
answered  for  by  the  one  in  connection  with  whose  return 
it  occurred.     (Reg.  ::::  Rev.,  Art.  26.) 

[Page  385.] 

When  Filed.  The  time  for  filing  all  returns  due  after 
October  16,  1917,  and  on  or  before  March  1,  1918.  under 
the  Act  of  September  8,  1916.  and  the  Act  of  October 
3,  1917.  for  income  and  excess  profits  taxes,  whether 
made  on  the  basis  of  the  calendar  year  or  of  a  fiscal 
year  ended  during  the  year  1917,  is  extended  1«>  April  1, 
1'»1S.  (T.  I).  26f)<n  This  includes  returns  of  informa- 
tion at  the  source  and  withholding  at  the  source  and 
returns  by  individuals  and  corporations. 

[Page  389.] 

Verification  Abroad.  Income  tax   returns  executed 

abroad   may  be  attested  free  of  charge  before  United 

States   consular   officers.  Where   a   foreign   notary   or 


732  HOLMES   INCOME   TAX   SUPPLEMENT 

other  official  having  no  seal  shall  act  as  attesting  officer, 
the  authority  of  such  attesting  officer  should  be  certified 
to  by  some  judicial  official  or  other  proper  officer  having 
knowledge  of  the  appointment  and  official  character  of 
the  attesting  officer.     (Reg.  33  Rev.,  Art.  26.) 

[Page  394.] 

Returns  of  Fiduciaries.  An  executor  acts  for  his 
principal  and  not  for  the  beneficiaries  of  the  estate  of  his 
principal.  Beneficiaries  are  not  entitled,  as  such,  to  an 
inspection  of  returns  of  income  filed  by  such  executor. 
(Reg.  33  Rev.,  Art.  26.) 


CHAPTER  36 

ASSESSMENT  AND  PAYMENT  OF  THE  TAX 

[Page  404.] 

Advance  Payment  of  Tax.  As  to  the  method  of  com- 
puting the  tax  to  be  paid  in  the  case  of  advance  pay- 
ments, the  Treasury  Department  has  issued  the  following 
instructions : 

If  taxpayers  elect  to  make  advance  partial  payments 
on  their  income  or  excess  profits  taxes,  or  both,  as  pro 
vided  by  Section  1009  of  the  Act  of  October  3,  1917,  at 
least  one-fourth  of  the  estimated  tax  due  must  be  paid 
within  thirty  days  after  the  close  of  the  taxable  year,  at 
least  an  additional  fourth  within  two  months  after  the 
close  of  the  taxable  year,  at  least  an  additional  fourth 
within  four  months  after  the  close  of  the  taxable  year, 
and  the  remainder  of  the  tax  due  on  or  before  the  time 
now  fixed  by  law  for  such  payment.  For  the  first  tax- 
able year,  this  means  in  the  case  of  partnerships  and 
porporations  who  do  not  fix  their  own  fiscal  years  and  in 


INCOME   TAX  BULINi  733 

the  case  oi*  individuals  that  at  least  one-fourth  of  the 
estimated  tax  due  must  be  paid  on  or  before  January  30, 
1918,  at  least  an  additional  fourth  on  or  before  February 
28,  1918,  at  least  an  additional  fourth  on  or  before  April 
30,  1918,  and  the  remainder  of  the  tax  due  on  or  before 
June  15,  1918.  In  the  case  of  a  partnership  or  corpora- 
tion whose  fiscal  year  ends  July  31,  for  example,  at 
least  one-fourth  of  the  estimated  tax  due  must  be  paid 
on  or  before  August  30,  at  least  an  additional  fourth  on 
or  before  September  29,  at  least  an  additional  fourth  on 
or  before  November  28,  and  the  remainder  of  the  tax 
due  on  or  before  January  12,  165  days  after  the  close 
of  its  fiscal  year.  Taxpayers  are  not  allowed  under  these 
regulations  to  make  advance  payments  in  installments  or 
in  whole  before  the  close  of  their  taxable  year.  Upon  the 
first  three  installments,  interest  at  the  rate  of  3%  per 
annum  (365  days)  will  be  allowed  from  the  date  each 
payment  is  made  to  the  date  now  fixed  by  law  for  such 
payment.  If  the  final  payment  is  made  within  4% 
months  after  the  close  of  the  taxable  year,  interest  at 
the  rate  of  3%  per  annum  (365  days)  will  be  allowed 
from  the  date  of  payment  to  the  date  now  fixed  by  law 
for  such  payment. 

In  arriving  at  the  amount  of  the  fourth  installment 
required  to  satisfy  the  assessed  tax,  it  will  be  necessary 
to  find  the  difference  between  the  assessed  tax  and  the 
sum  of  the  first  three  installments  and  the  interest  at  3% 
per  annum  (365  days)  on  same  from  the  dates  of  pay- 
ment to  the  date  now  fixed  by  law  for  such  payment. 
This  difference  will  be  the  amount  of  the  fourth  install- 
ment, if  said  installment  is  paid  after  the  expiration  of 
4y2  months  after  the  close  of  the  taxable  year,  since 
Sec.  1009  provides  that  no  credit  for  interest  shall  be 
allowed  on  payments  in  excess  of  taxes  determined  to 


734  HOLMES    [NCOME   TAX   SUPPLEMENT 

be  duo,  nor  on  payments  made  after  the  expiration  of 
4V2  months  after  the  close  of  the  taxable  year. 

If  the  fourth  installment  is  paid  before  the  expiration 
of  41 2  months  after  the  close  of  the  taxable  year,  the 
amount  of  such  installment  will  be  found  by  dividing  the 
difference  mentioned  in  the  preceding  paragraph  by 
1.00  plus  the  interest  at  3%  per  annum  (365  days)  on 
$1  for  the  number  of  days  from  the  date  on  which  said 
fourth  installment  is  paid  to  date  now  fixed  by  law  for 
such  payment. 

For  example,  a  taxpayer  on  January  15,  1918,  files  an 
income  or  excess  profits  tax  return  showing  a  tax  liability 
of  $4,000  and  with  the  return  makes  partial  payment  of 
$1,000;  February  25,  1918,  makes  a  second  payment  of 
$1,000 ;  March  25,  1918,  a  third  payment  of  $1,000 ;  and 
the  balance  May  1,  1918. 

The  first  payment  draws  interest  at  the  rate  of  3% 
per  annum  from  January  15  to  June  15,  151  days  (in 
January,  16 ;  February,  28 ;  March,  31 ;  April,  30 ;  May, 
31;  and  June,  15),  or  $12.41,  amount  $1,012.41;  the  sec- 
ond payment,  110  days  (February,  3;  March,  31;  April, 
30;  May,  31;  and  June,  15),  or  $9.04,  amount  $1,009.04; 
and  the  third  payment,  82  days  (March,  6;  April,  30; 
May,  31;  and  June,  15),  or  $6.74  ($6,739),  amount 
$1,006.74.  The  sum  of  the  three  payments  and  interest 
thereon  is  $3,028.19,  making  the  difference  $971.81.  The 
amount  to  be  paid  on  May  1, 1918,  to  satisfy  this  difference 
is  found,  by  dividing  $971.81,  by  1.00369863,  the 
"amount"  of  $1  for  45  days  (May,  30;  and  June,  15), 
at  3%  to  be  $968.23  ($968,228). 

If,  in  the  example  given  above,  the  fourth  payment 
were  made  May  16,  1917,  the  taxpayer  would  be  required 
to  pay  the  whole  of  the  difference,  $971.81,  as  no  interest 
would  be  allowable  on  same  under  the  law. 


LNCOMB   TAX   ItULIN(iS  735 

If  the  taxpayer  elects  to  pay  the  whole  of  the  tax  in 
advance,  that  is,  after  the  close  of  the  taxable  year  and 
prior  to  the  expiration  of  4Vo  months  after  the  close  of 
the  taxable  year,  the  amount  to  be  paid  to  satisfy  the  tax 
will  be  determined  by  dividing  the  amount  of  said  tax  by 
1.00  plus  the  interest  on  $1  at  3%  per  annum  (365  days) 
for  the  number  of  days  from  the  date  of  payment  to  the 
date  now  fixed  by  law  for  such  payment. 

If  the  advance  payment  in  whole  is  made  at  the  time 
of  filing  the  return,  and  if  upon  the  examination  of  such 
return  in  this  office,  it  is  found  that  the  payment  was  in 
excess  of  the  amount  required,  together  with  the  interest 
thereon  to  satisfy  the  tax  actually  due,  the  taxpayer  will 
be  entitled  to  the  refund  of  the  amount  of  excess  payment 
(but  not  the  interest  thereon)  by  making  claim  for  same 
on  Form  46. 

In  arriving  at  the  amount  of  excess  payment,  the  tax 
assessed  should  be  divided  by  1.00  plus  the  interest  at 
3%  per  annum  (365  days)  on  $1  for  the  number  of  days 
from  the  date  of  payment  to  the  date  now  fixed  by  law 
for  such  payment.  The  difference  between  the  amount 
actually  paid  in  advance  and  the  quotient  will  be  the 
amount  of  excess  payment. 

The  interest  at  the  rate  of  3%  per  annum  (365  days), 
allowed  to  a  taxpayer  on  advance  payments  on  income 
mid  excess  profits  taxes,  must  be  considered  income  and 
accounted  for  as  income  by  the  taxpayer  in  his  return 
for  the  year  in  which  said  interest  is  allowed.  (T.  D. 
2622.) 


736 


HOLMES   INCOME   TAX   SUPPLEMENT 


INTEREST  TABLE 
Interest  uu  $1.UU  at  3  per  cent  per  365  days,  1  day  to  165  days. 


Days  Interest 

1 $0.000082192 

2 000164384 

3 000246575 

4 000328767 

5 000410959 

6 000493151 

7 000575342 

8 000657534 

9 000739726 

10 000821918 

11 000904110 

12 000986301 

13 001068493 

14 001150685 

15 001232877 

16 001315068 

17 001397260 

18 001479452 

19 001561644 

20 001643836 

21 001726027 

22 001808219 

23 001890411 

24 001972603 

25 002054795 

26 002136986 

27  002219178 

28  002301370 

29 002383562 

30 002465753 

31  002547945 

32 002630137 

33   002712329 

34 002794521 

35  002876712 

36   002958904 

37    003041096 

38   003123288 

39      003205479 

40      003287671 

41      003369863 

42       003452055 

43       003534247 

44       003616438 

45       003698630 

46      003780822 

47  003863014 


Days  Interest 

48 003945205 

49 004027397 

50 004109589 

51 004191781 

52 004273973 

53 004356164 

54 004438350 

55 004520548 

56 004602740 

57 004684932 

58 004767123 

59 004849315 

60 004931507 

61 005013699 

62 005095890 

63 005178082 

64 005260274 

65 005342466 

66 005424658 

67 005506849 

68 005589041 

69 005671233 

70 005753425 

71 005835616 

72 005917808 

73 006000000 

74 006082192 

75 006164384 

76 006246575 

77 006328767 

78 006410959 

79 006493151 

80 006575342 

81 006657534 

82 006739726 

83 006821918 

84 006904110 

85 006986301 

86 007068493 

87  007150685 

88     007232877 

89 007315068 

90  007397260 

91   007479452 

92       007561644 

93  007643836 

94 007726027 


INCOME    TAX    KULINUS 


737 


Interest 

.007808219 

.007890411 

.007972603 

.008054795 

.008136986 

.008219178 


Daya 

95 

96 

97 

98 

99 

LOO 

101 008301370 

in- 008383562 

103 008465753 

Mil 008547945 

L05 008630137 

L06 008712329 

I  n7 008794521 

108 008876712 

L09 008958904 

110 009041096 

111 009123288 

112 009205479 

L13 009287671 

1  I  1 009369863 

115 009452055 

116 009534247 

L17 009616438 

118 009698630 

119 009780822 

120 009863014 

121 009945205 

122 010027397 

123 010109589 

124 010191781 

125 010273973 

126 010356164 

127 010438356 

128 010520548 

129 010602740 

1 30 010684932 


Days  Interest 

i:;i 0107671-.. 

L32 01084931.". 

L33 010031507 

L3  1 011013691) 

L35 01109589M 

136 011178ii^2 

117 011260274 

L38 011342466 

L39 011424658 

Hi) 011506849 

111 011589041 

142 0116712 ::  I 

143 01175342". 

144 011835616 

145 011917808 

146 012000000 

147 012082192 

148 012164384 

149 01224657". 

150 012328767 

ir.1 012410959 

152 .012493151 

153 012575342 

1 5  I 012657534 

L55 012739726 

156 .012821918 

157 012904110 

158 012986301 

1 59 013068493 

160 013150685 

161 013232877 

162 013315068 

163 01339726(1 

164 013479452 

165 013561041 


[Page  405.] 

Excess  Payment  of  Tax.  An  excess  payment  of  tax 
in  one  year  cannot  bo  offset  against  an  assessment  of 
fax  for  a  subsequent  year.     (Reg.  -°>3  Rev..  Art.  30. > 

Manner  of  Payment  of  Taxes.  The  date  on  which  the 
collector  receives  an  uncertified  check  in  payment  of  the 
tax  is  considered  the  date  of  payment,  unless  the  check 
is  returned  dishonored.  (T.  D.  2627.)  In  the  payment  of 
the  tax  the  fractional  part  of  a  cent  is  disregarded  unless 


738  HOLMES   INCOME   TAX   SUPPLEMENT 

it  amounts  to  a  half  cent  or  more,  in  which  case  the 
fraction   is  increased  to  one  cent.     (Reg.  33  Rev.,  Art. 

41.) 

[Page  415.] 

Waiving  the  Three-year  Limitation.  Where  the  lim- 
itation of  the  statute  as  to  assessment  has  run  and  a 
written  waiver  of  exemption  from  assessment  is  given 
by  the  taxpayer,  the  ad  valorem  penalty  of  50  cent,  addi- 
tion to  tax,  is  not  to  be  assessed  for  delinquency  in  filing 
return.    (Reg.  33  Rev.,  Art.  52.) 

[Page  417.] 

Lien  for  Unpaid  Taxes.  Tax  due  on  income  has  the 
status  of  a  debt  due  the  United  States.  Persons  receiv- 
ing property  charged  with  such  indebtedness  must  answer 
for  the  debt.     (Reg.  33  Rev.,  Art.  39.) 


CHAPTER  37 

PENALTIES    AND    COMPROMISES 

[Page  421.] 

Specific  penalties  provided  by  the  income  tax  law  in 
the  case  of  individuals  are  held  to  attach  to  Ihe  person 
and  in  the  case  of  the  death  of  such  person  are  non- 
enforceable.  Ad  valorem  penalties  (those  measured  by 
income)  attach  to  the  income  and  are  to  be  enforced  re- 
gardless of  the  death  of  the  owner  of  the  income  by 
which  the  penalty  is  measured.  (Txog.  33  Rev.,  Art. 
51.) 

[Page  422.] 

Exception.  The  words  ''reasonable  cause"  as  used 
in  the  provision  of  law  referred  to  in  R.  S.  Sec.  3176,  as 


INCOME    TAX    RULINGS  739 

amended  by  Ah  of  September  8,  1916,  is  held  to  be 
sur 1 1  a  condition  of  Eacl  as  had  the  taxpayer  in  default  ex- 
ercised ordinary  business  care  and  prudence  it  would  have 
been  impracticable  or  impossible  for  him  to  have  filed  his 
return  in  the  prescribed  time.  I  )elinquent  returns  must 
be  accompanied  by  an  affirmative  showing  of  fact  alleged 
as  reasonable  cause  Eor  excuse  from  the  50  per  cent 
penalty.  This  showing  must  be  in  the  form  of  an  affi- 
davit, under  oath,  and  should  be  attached  to  the  return. 
I  Reg.  33  Rev.,  Ait.  54.) 

[Page  424.] 

Fraudulent  Returns.  The  100  per  cent  penalty  is 
added  to  the  amount  of  tax  shown  by  the  correct  return. 
In  addition  a  tine  not  exceeding  $2,000,  or  imprisonment 
not  exceeding  one  year  or  both,  in  the  discretion  of  the 
court,  with  costs  of  prosecution,  is  also  imposed.  (Reg. 
33  Rev.,  Art.  53.) 

[Page  425.] 

Delay  in  Payment  of  the  Tax.  Collectors  should  is- 
sue Form  17  for  the  purpose  of  fixing  definitely  the  date 
when  the  live  per  cenl  penalty  accrues  and  interest  at 
one  per  cenl  pec  month  begins  to  run.  (Reg.  33,  Rev. 
Art.  41.)  A  specific  penalty  of  not  less  than  $20  nor 
more  than  $1,000  is  also  imposed  for  delay  in  paying  the 
lax.     (id.  Art.  51.) 

CHAPTER  40 

INFORM  VITON    AT    THE    SOURCE 

[Page  450.] 

Miscellaneous  Income,  Gains  or  Profits.     It  has  been 
held  in  an  informal  ruling  that  such  payments  as  are  made 
F.  T.  Tax  Supp  —  6 


740  HOLMES    INCOME   TAX   SUPPLEMENT 

for  advertising,  freight,  cartage,  lire  insurance  premiums, 
and  discounts  paid  to  banks  are  not  required  to  be  re- 
ported by  the  payor.  (Telegram  from  Commissioner  of 
Internal  Revenue,  dated  February  5,  1918.)  Where  a 
person  receives  a  cash  compensation  for  services  ren- 
dered and  in  addition  thereto  living  quarters,  the  value 
to  such  person  of  the  quarters  furnished  constitutes  in- 
come subject  to  the  tax  and  the  return  of  information  at 
the  source  required  under  Section  28  of  the  Act  of  Octo- 
ber 3,  1917,  must  include  the  cash  compensation  received 
plus  the  value  of  the  living  quarters  if  the  sum  of  both 
equals  or  exceeds  $800  for  a  tax  year.  (Reg.  33  Rev., 
Art.  34.) 

[Page  454.] 

Procedure  in  Paying'  Income.  When  the  person  re- 
ceiving a  payment  falling  within  the  provisions  of  law 
for  information  at  the  source  is  not  the  actual  owner  of 
the  income  received,  the  name  and  address  of  the  actual 
owner  shall  be  furnished  upon  demand  of  the  person, 
corporation,  partnership,  or  association  paying  the  in- 
come, and  in  default  of  a  compliance  with  such  demand 
1he  payee  becomes  liable  to  a  penalty  of  not  less  than  $20 
nor  more  than  $1,000.  (Reg.  33  Rev.,  Art.  36.)  The 
law  imposes  no  duty  however  upon  the  payor  of  the  in- 
come to  inquire  as  to  the  ownership  thereof.  Tt  would 
seem  that  the  payor  of  the  income  is  fully  protected  by 
reporting  in  good  faith  the  name  and  address  of  the 
one  to  whom  the  income  is  paid. 

[Page  454.] 

Return  of  Information  at  the  Source.  Two  forms  of 
return  have  "been  prescribed  by  the  Treasury  Depart- 
ment for  reporting  payments  of  miscellaneous  income. 


INCOME   TAX   RULINGS  741 

One  form  is  known  aa  Form  1099,  a  copy  of  which  is  rr 
quired  to  be  tilled  out  for  each  person,  firm  or  corpora 
tion  to  whom  or  which  iixed  or  determinable  gains,  profits 
or  income  of  $800  or  more  has  been  paid  during  the  tax 
j  ear.  The  other  (Form  109(>j  is  merely  a  letter  of  trans 
initial  to  be  used  in  forwarding  the  several  Forms  1099 
to  the  commissioner.  (Reg.  33  Rev.,  Arts.  34  and  35.) 
No  form  has  yet  been  issued  for  the  purpose  of  reporting 
dividends.  This  return,  when  required,  will  be  mad'' 
upon  a  form  prescribed  for  this  purpose,  and  will  be  for- 
warded direct  to  the  office  of  the  Commissioner  of  In- 
fernal Revenue  within  ten  days  from  the  date  of  the 
receipt  of  the  notice  requiring  such  return,  (id.  Art. 
237.)  No  form  of  return  has  yet  been  prescribed  for  use 
by  brokers  in  reporting  the  gains  and  losses  of  their 
customers. 

[Page  455.] 

Collection  of  Foreign  Payments.  Persons,  corpora- 
tions or  partnerships,  undertaking  as  a  matter  of  busi- 
ness or  for  profit  the  collection  of  foreign  items  are  re- 
quired to  write  or  stamp  on  the  face  of  each  item :  'In- 
formation obtained  and  furnished  by 

i  name  of  collecting  agent)."     (Reg.  33  Rev.,  Art.  48.) 


CHAPTER  41 

COLLECTION  OP  TAX  AT  THE  SOURCE 

[Page  457.] 

An  annual  return  of  the  tax  withheld  is  required  to 
be  made  in  the  manner  and  on  the  form,  prescribed  by 
the  Commissioner  of  Internal  Revenue  with  the  approval 
of  the  Secretary  of  the  Treasury.    This  return  is  to  be 


742  HOLMES   INCOME   TAX   SUPPLEMENT 

made  after  February  1  and  on  or  before  March  1  annu- 
ally. The  return  shows  the  name  and  address  of  the 
withholding  agent,  character  of  income,  and  the  name 
and  address  of  the  recipient  or  his  agent,  amount  of 
income,  exemption  claimed,  and  the  amount  of  tax  at 
2  per  cent  withheld  thereon.  Any  income  withheld  from 
a  citizen  or  resident  alien  in  1917  prior  to  October  3, 
1917,  except  in  the  case  covered  by  section  9  (c)  (from 
interest  paid  on  securities  having  a  tax-free  covenant 
clause)  of  the  act  of  September  8,  1916,  as  amended,  shall 
be  released  by  the  withholding  agent  and  paid  over  to  the 
individual  from  whom  it  was  withheld  or  his  proper  legal 
representative.  The  income  upon  which  such  tax  was 
so  deducted  and  released  shall  be  included  in  the  return, 
if  any,  of  such  individual  for  the  purpose  of  assessment 
and  collection  of  the  income  tax.  (Reg.  33  Rev.,  Art. 
47.)  Where  substitute  certificate  Form  1059  was  used 
in  1917  in  collecting  coupons  from  bonds,  and  the  amount 
withheld  is  required  to  be  released  and  paid  back  under 
the  provisions  of  Section  1212  of  the  Act  of  October  3, 
1917,  the  withholding  agent  should  request  the  bank  or 
collection  agency  using  such  certificate  to  disclose  the 
name  and  address  of  the  owner  of  the  bond,  as  shown 
by  the  original  certificate,  and  the  bank  or  collection 
agency  is  required  to  make  such  disclosure  to  the  with- 
holding agent.  If  the  owner  of  the  bond  was  a  citizen 
or  resident  of  the  United  States,  the  withholding  agent 
should  refund  the  amount  of  tax  deducted.  If  the 
owner  was  a  non-resident  alien  no  refund  should  be  made, 
but  the  withholding  agent  should  report  the  amount  ac- 
cordingly and  pay  over  the  sum  as  in  other  cases  where 
withholding  took  place  against  non-resident  aliens.  (T. 
D.  2635.) 


I     ■  OME   TAX    BULLNQS 


743 


[Page  465.] 

Withholding  on  Payment  of  Bond  Interest.  Where 
qo  ownership  certificate  accompanies  a  coupon  and  it 
is  impossible  to  ascertain  the  information  necessary  to 
determine  whether  or  not  the  tax  should  be  withheld  or 
the  rate  which  applies,  the  tax  should  be  withheld  at  the 
pate  of  0%.  If  any  excess  amount  of  tax  should  thus 
be  paid  to  the  Government,  the  payment  may  be  ad- 
justed by  claim  for  refund.  If  coupons  are  not  accom- 
panied by  certificates  disclosing  ownership,  the  first 
bank  which  accepts  the  coupon  for  collection  is  required 
to  fill  out  Form  1000  iis  revised  January,  1918,  entering 
the  interest  on  line  4  and  the  debtor  corporation  will  be 
required  to  withhold  the  tax  on  that  amount.  (Telegram 
from  the  Treasury  Department  dated  January  28,  1918, 
and  letter  from  Treasury  Department  dated  January 
30,  1918;  I.  T.  S.,  1918,  Paragraphs  3071  and  3072.) 

[Page  466.] 

Interest  on  Bonds  Containing  Covenants  to  Pay  the 
Tax.  The  withholding  provisions  of  the  income  tax  law 
apply  in  the  case  of  citizens  and  resident  aliens  only 
in  case  income  is  derived  from  interest  on  bonds  and 
mortgages,  deeds  of  (rust,  or  other  similar  obligations 
of  corporations,  associations,  etc.,  which  have  a  "tax- 
free"  covenant  clause  (i.e.,  a  contract  or  provision  by 
which  the  obligor  agrees  to  pay  any  portion  of  the  tax 
imposed  by  this  title  upon  the  obligee  or  to  reimburse  the 
obligee  in  any  portion  of  the  tax  or  to  pay  the  interest 
without  deduction  for  any  tax  which  the  obligor  may  be 
required  or  permitted  to  pay  thereon  or  to  retain  there- 
from under  any  law  of  the  United  States),  regardless 
of  the  amount  and  period  of  payment.  The  amount  to 
be  withheld  is  2  per  cent  on  the  amount  of  payment,  un- 


744  HOLMES   INCOME    TAX   SUPPLEMENT 

less  the  person  entitled  to  receive  such  interest  shall  file 
with  the  withholding  agent,  on  or  before  February  1,  a 
signed  notice  in  writing  claiming  the  benefit  of  an  allow- 
able exemption  under  section  7,  act  of  September  8,  1916, 
as  amended.  (Reg.  33  Rev.,  Art.  43.)  Confusion  seems 
to  have  been  created  in  the  minds  of  bondholders  as  to 
the  meaning  of  that  provision  of  the  law  which  refers  to 
the  filing  of  a  claim  for  exemption  on  or  before  February 
1st.  No  such  claim  should  be  filed  if  a  bondholder  intends 
to  have  the  corporation  assume  the  burden  of  2  per 
cent  normal  tax  on  the  interest  paid  to  him.  If  it  is 
desired  to  file  a  claim  for  exemption  the  same  may  be 
filed  on  or  before  February  1st  of  the  year  following 
that  in  which  the  interest  was  received.  In  filing  such 
claim  for  exemption  Form  1001  should  be  used.  The 
total  amount  of  exemption  which  may  be  claimed  is  the 
personal  exemption  allowed  by  the  Act  of  October  3, 
1917,  that  is,  $1,000  in  the  case  of  unmarried  persons,  and 
$2,000  in  the  case  of  married  persons  and  heads  of  fam- 
ilies, with  an  additional  $200  for  each  minor  child. 
(See  Reg.  33  Rev.,  Art.  44.)  The  matter  of  complying 
with  the  covenant  of  the  bond  is  a  matter  to  be  adjusted 
between  the  debtor  corporation  and  the  bondholder.  If, 
however,  it  is  clearly  established  by  affidavit  or  other- 
wise that  the  debtor  corporation  has  actually  withheld 
and  paid  to  the  proper  officers  of  the  United  States  the 
tax  on  such  interest  income,  the  recipient,  having  re- 
turned such  interest  as  income,  may  take  credit  against 
any  tax  to  which  subject  on  the  basis  of  return,  for  the  tax 
so  paid  by  the  debtor  corporation.  (Reg.  33  Rev.,  Art. 
122.) 

[Page  468.] 

Car-trust  Certificates.     Car-trust  certificates  are  held 
to     be    obligations    similar    to    corporate    bonds    and 


INCOME   TW    BULING8  i  15 

mortgages.  The  trustees  are  therefore  required  to  with- 
hold the  tax  and  if  the  certificates  contain  a  contract  or 
provision  by  which  the  obligor  agrees  to  pay  any  portion 
of  the  tax  imposed  by  this  title  upon  the  obligee  or  re- 
imburse the  obligee  for  any  portion  of  the  tax,  or  to  pay 
the  interest  without  deduction  for  any  tax  which  the 
obligor  may  be  required  to  pay,  the  trustees  in  such  ea 
in  making  interest  payments  on  these  certificates,  will, 
in  the  absence  of  claims  for  exemption  when  interest  pay- 
ments are  made  to  individuals,  withhold  the  normal  in- 
come tax  on  such  payments  regardless  of  the  amount 
thereof.     (Reg.  33  Rev.,  An.  L88.) 

[Page  471.] 

Ownership  Certificates.  The  owners  of  bonds  of  do- 
mestic and  resident  corporations  shall,  when  presenting 
interest  coupons  for  payment,  file  a  certificate  of  owner- 
ship for  each  issue  of  bonds,  showing  the  name  and  ad- 
dress of  the  debtor  corporation,  the  name  and  address  of 
the  owner  of  the  bonds,  whether  the  payee  is  married  or 
the  head  of  a  family,  and  the  amount  of  interest.  (Reg. 
33  Rev.,  Art.  43.) 

[Page  473.] 

Form  1000.  Form  1000,  revised,  shall  be  used  a 
when  no  personal  exemption  is  claimed  against  interest 
on  bonds  containing  a  "tax-free"  covenant  by  citizens  or 
residents  of  the  United  States:  (h)  by  nonresident  alien 
individuals,  foreign  corporations  having  no  office  or  place 
of  business  in  the  United  States  whether  or  not  such 
bonds  contain  a  "tax-free"  covenant;  and  (c)  in  the 
case  where  coupons  are  received  not  accompanied  by 
certificates  of  ownership.  The  first  bank  receiving 
coupons  not  accompanied  by  ownership  certificates  will 


746  HOLMES   INCOME   TAX   SUPPLEMENT 

make  a  certificate  crossing  out  "owner"  and  inserting 
"payee"  and  will  enter  the  amount  of  interest  on  line 
4.     (Reg.  33  Rev.,  Art.  43.) 

[Page  473.] 

Form  1001.  Form  1001,  revised,  shall  be  used  (a) 
when  personal  exemption  is  claimed  against  interest  on 
bonds  containing  a  "tax-free"  covenant  by  citizens  or 
residents  of  the  United  States,  also  when  presenting 
coupons  from  bonds  not  containing  a  "tax-free"  cov- 
enant; (b)  by  domestic  partnerships,  corporations,  or 
associations;  (c)  by  nonresident  alien  partnerships;  and 
(d)  by  foreign  corporations  having  an  office  or  place  of 
business  in  the  United  States,  whether  or  not  such  bonds 
contain  a  "tax-free"  covenant.  In  case  a  citizen  or  resi- 
dent individual  receives  interest  on  bonds  containing  a 
"tax-free"  covenant  in  excess  of  the  amount  of  personal 
exemption  which  the  individual  may  claim,  any  such 
excess  must  be  reported  on  Form  1000,  revised.  (Reg. 
33  Rev.,  Art.  43.) 

[Page  473.] 

Form  1004.  This  form  is  superseded  by  revised 
Form  1000  referred  to  above. 

[Page  473.] 

Substitute  Certificates.  Collecting  agents,  responsi- 
ble banks  and  bankers  receiving  coupons  for  collection 
with  ownership  certificates  attached  may  present  the 
coupons  with  the  original  certificates  to  the  debtor  corpora- 
tion or  its  duly  authorized  withholding  agent  for  collec- 
tion or  the  original  certificates  may  be  detached  and  for- 
warded direct  to  the  Commissioner  of  Internal  Revenue, 
provided  such  collecting  agent  shall  substitute  for  such 


[NCOME    rv\    RULINGS  TIT 

■    rtificate  its  own  certificat<   and  shall  keep  a  complete 
record  of  each  transaction  showing— 

1.  Serial  nuiiiber  of  item  received. 

2.  Date  received. 

:;.  Name  and  address  of  person  Erom  uli received. 

I.  Name  of  debtor  corporal  ion. 

-">.   ('lass  of  bonds  from  which  coupons  wiv  cut. 

0.  Face  amount  of  coupons. 

For  the  purpose  of  identification  the  substitute  certifi- 
cates shall  be  numbered  consecutively  and  corresponding 
numbers  given  the  original  certificates  of  ownership. 
Substitute  certificates  by  collecting  agents,  banks  and 
bankers,  in  lieu  of  original  certificates  of  ownership  ac- 
companying coupons  presented  for  collection  shall  be 
discontinued  with  respect  to  ownership  certificates  pre- 
sented with  coupons  for  collection  by  non-resident  alien 
individuals,  firms,  corporations,  organizations,  etc.  In 
all  such  cases  the  original  certificates  of  ownership  shall 
be  forwarded  to  the  debtor  corporation  without  substitu- 
tion. The  debtor  corporation  or  its  duly  authorized 
withholding  agent  shall  forward  all  certificates  to  the 
Collector  of  Internal  Revenue  with  its  duplicate  monthly 
list  returned,  Form  1012,  revised,  and  such  collector  shall 
forward  the  original  return  and  the  certificates  to  the 
commissioner,  as  heretofore,     i  Reg.  •">•'!  Rev.,  Art.  43.) 

[Page  476.] 

Banks.  The  long-established  rule  that  banks  were 
not  required  to  withhold  the  normal  tax  on  interest  paid 
or  accruing  on  deposits  has  been  revoked  and  banks  are 
now  required  to  withhold  a  normal  tax  of  2  per  cent  on 
interest  paid  to  non-resident  alien  individuals.  (T.  D. 
2652.)  It  seems  the  word  "paid"  used  in  the  foregoing 
ruling  is  intended  to  include  interest  which  is  actually 


f48  HOLMES   INCOME   TAX   SUPPLEMENT 

paid  to  nou-resideut  alien  individuals  and  also  interest 
credited  to  their  accounts,  that  is,  deduction  is  to  take 
place  when  the  interest  is  placed  at  the  disposal  of  the 
depositors. 

[Page  477.] 

Employers.  It  is  held  that  salaries,  wages  and  com- 
missions, paid  by  domestic  corporations,  resident  indi- 
viduals, or  partnerships  to  non-resident  alien  employees 
for  services  rendered  entirely  in  a  foreign  country  are 
not  subject  to  deduction  and  withholding  of  the  normal 
tax,  and  such  payments  of  income  will  not  be  subject  to 
the  income  tax  in  the  hands  of  the  recipient  as  from  a 
source  within  the  United  States.    (Reg.  33  Rev.,  Art.  32.) 

[Page  477.] 

Lessors.  Rent  paid  by  domestic  corporations,  resi- 
dent individuals,  or  partnerships  to  non-resident  aliens 
as  rent  for  property  located  in  a  foreign  country  is  not 
subject  to  collection  at  the  source.  (Reg.  33  Rev.,  Art. 
32.) 

[Page  479.] 

Monthly  List  Returns.  The  tax  withheld  from  bond 
interest  will  be  accounted  for  monthly  on  Income-Tax 
Form  1012  (Revised  1918). 

[Page  480.] 

Annual  List  Returns.  Return  is  to  be  made  for  the 
tax  withheld  in  manner  and  on  a  form  to  be  prescribed 
by  the  Commissioner  of  Internal  Revenue  with  the  ap- 
proval of  the  Secretary  of  the  Treasury.  This  return 
is  to  be  made  after  February  1  and  on  or  before  March  1 
annuallv.    The  return  shall  show  the  name  and  address 


INCOME   TAX    RULINGS  749 

o!'  the  withholding  agent,  character  of  income,  and  the 
name  and  address  of  the  recipient  or  his  agent,  amount 
of  income,  exemption  claimed,  and  the  amount  of  tax  at 
2  per  cent  withheld  thereon.  (Reg.  33,  Rev.  Art.  46. ) 
The  form  prescribed  as  an  annual  list  return  for  report- 
ing the  normal  tax  withheld  on  salaries,  wages,  rent, 
etc.,  paid  to  non-resident  alien  individuals  is  Form  1042 
(Revised  1918).  Separate  reports  of  the  payments  en- 
tered on  such  form  are  also  required  to  be  made  on  Form 
1098.  The  form  to  be  used  in  reporting  annually  income 
withheld  at  the  source  on  payments  of  interest  on  cor- 
porate bonds  and  dividends  on  corporate  stock  is  Form 
1013  I  Revised  L918). 


CHAPTER  44 

TAX  ON    UNDISTRIBUTED  INCOME  OP  CORPORATIONS 

[Page  496.] 

Undistributed  Net  Income.  In  order  to  determine  the 
amount  of  such  net  income  subject  to  this  tax,  the  in- 
crease in  the  surplus  balance  at  the  close  of  the  taxable 
year  as  compared  with  the  surplus  balance  at  the  begin- 
ning of  such  year,  shall  be  analyzed  so  to  account  for 
the  disposition  thereof  in  increase  in  assets,  decrease  in 
liabilities  or  in  dividends,  and  the  net  increase  in  cur- 
rent assets  over  current  liabilities  shall  be  subject  to  the 
above  tax  of  10  per  cent  unless  it  can  be  conclusively 
shown  by  the  corporation  that  such  increase  is  retained 
to  provide  for  an  actual  increase  in  business  or  for  addi- 
tions to  plant  or  the  reduction  of  bonded  or  other  fixed 
liabilities.     (Reg.  33,  Rev.  Art.  238.) 


750  HOLMES   INCOME   TAX   SUPPLEMENT 

CHAPTER  45  l 

THE  WAR  EXCESS  PROFITS   TAX 
DEFINITIONS 

Article  1.  Definitions.— When  used  in  these  regula- 
tions the  terms  defined  in  Articles  2  to  9,  inclusive, 
shall  unless  otherwise  indicated  by  the  context,  be 
deemed  to  be  used  only  with  the  scope  or  meaning  as- 
cribed to  them  respectively  in  such  articles. 

Art.  2.  Corporation. — The  term  "corporation"  in- 
cludes joint-stock  companies  or  associations,  no  matter 
how  created  or  organized,  insurance  companies  and 
limited  partnerships.2 

Art.  3.  Domestic  and  foreign.— The  term  "domestic" 
means  created  under  the  law  (statutory  or  other)  of 
the  United  States  or  any  State  thereof,  Alaska,  Hawaii, 
or  the  District  of  Columbia,  and  the  term  "foreign" 

1  The  most  practical  discussion  of  the  War  Excess  Profits  Tax 
Law  at  the  present  time  is  contained  in  the  official  regulations  of 
the  Treasury  Department,  the  text  of  which  is  printed  in  full 
herein  with  the  author 's  comments  and  explanation  in  the  footnotes. 
These    regulations    are    officially    designated    "Regulations    No. 

41." 

2  See  Holmes  Income  Tax,  Ch.  12,  pp.  126  and  127;  also  Ch. 
10,  p.  103.  The  law  defines  the  term  "corporation"  to  include 
joint-stock  companies  or  associations  and  insurance  companies. 
To  include  all  limited  partnerships  in  the  term  seems  to  extend 
the  provision  of  the  statute  by  implication  beyond  the  clear 
import  of  the  language  used,  contrary  to  the  established  rules 
of  construction.  Limited  partnerships  or  partnership  associations 
formed  under  some  statutes  may  have  characteristics  more  in  the 
nature  <»f  a  joint-stock  company  than  a  partnership  but  this  is  not 
true  of  nil  limited  partnerships.  The  status  of  a  limited  partner- 
ship should  rather  be  determined  in  each  instance  according  to  the 
similarity  of  its  characteristics  to  those  of  a  joint-stock  association. 


WAR   EXCESS   PROFITS   TAX  751. 

means  created  under  the  law  (statutory  or  other)  of 
any  other  possess] f  the  I  Inited  States  or  of  any  for- 
eign country  or  government. 

Art.  4.  United  States.— The  term  "United  States" 
(when  used  in  a  geographical  sense)  means  only  the 
Stales  thereof,  Alaska,  Hawaii,  and  the  District  of  Co- 
lumbia. 

Art.  5.  Taxable  year.— The  term  '"taxable  year" 
means  the  L2  months  ending  December  :!1  of  each  year, 
except  in  the  case  <>f  a  corporation  or  partnership 
which  lias  fixed  its  own  fiscal  year,  iii  which  case  it 
means  such  fiscal  year.  'The  first  taxable  year  is  the 
year  ending  December  31,  1917,  except  thai  in  the  ease 
of  a  corporation  or  partnership  which  lias  fixed  its  own 
fiscal  year,  the  firsl  taxable  year  is  the  fiscal  year  end 
ing  during  the  calendar  year  1917.3 

Art.  6.  Prewar  period. — The  term  "prewar  period" 
means  the  calendar  years  1911,  1912,  and  1913,  or  if  a 
corporation  <>r  partnership  was  not  in  existence  or  an 
individual  was  not  engaged  in  the  trade  or  business 
during  the  whole  of  such  three  years,  then  as  many  of 
such  years  during  the  whole  of  which  the  corporation 
or  partnership  was  in  existence  or  the  individual  was 
engaged  in  the  trade  or  business. 

Art.  7.  "Trade,"  "business,"  "trade  or  business" 
in  case  of  corporations  and  partnerships. — Tn  the  case 
of  a  corporation  or  partnership  all  income  Prom  what- 
ever source  derived  is  deemed  to  be  received  from  its 
trade  or  business,  and  the  terms  "trade,"  "business." 
and  "trade  or  business"  include  nil  sources  of  income. 

Art.  8.  "Trade"  in  the  case  of  individuals.-  Tn  the 

S For  special  provisions  as  to  prorating  tlio  amount  of  tax 
due  for  the  portion  of  any  fiscal  year  ending  during  the  calendar 

year  l!1 17.  sec  Articles  19  and  20. 


752  HOLMES   INCOME   TAX   SUPPLEMENT 

case  of  an  individual,  the  terms  "trade,"  " business, " 
and  "trade  or  business"  comprehend  all  his  activities 
for  gain,  profit,  or  livelihood,  entered  into  with  suffi" 
cient  frequency,  or  occupying  such  portion  of  his  time 
or  attention  as  to  constitute  a  vocation,  including  occu- 
pations or  professions.  When  such  activities  consti- 
tute a  vocation  they  shall  be  construed  to  be  a  trade  or 
business  whether  continuously  carried  on  during  the 
taxable  year  or  not,  and  all  the  income  arising  there- 
from shall  be  included  in  his  return  for  excess-profits 
tax. 

In  the  folloAving  cases  the  gain  or  income  is  not  sub- 
ject to  excess-profits  tax,  and  the  capital  from  which 
such  gain  or  income  is  derived  shall  not  be  included 
in  "invested  capital:"  (a)  Gains  or  profits  from  trans- 
actions entered  into  for  profit,  but  which  are  isolated, 
incidental,  or  so  infrequent  as  not  to  constitute  an  oc- 
cupation, and  (b)  the  income  from  property  arising 
merely  from  its  ownership,  including  interest,  rent,  and 
similar  income  from  investments  except  in  those  cases 
in  which  the  management  of  such  investments  really 
constitutes  a  trade  or  business. 

Art.  9.  "Dividend. ''—The  term  "dividend"  has  the 
same  meaning  as  in  Sec.  31  of  the  act  of  September  8, 
1  9]  6,  as  amended  by  the  act  of  October  3,  1917.4 

CORPORATIONS,  PARTNERSHIPS,  AND  INDIVIDUALS  SUBJECT  TO 

THE   TAX 

Art.  10.  Corporations. — Every  domestic  corporation 
which  has  for  the  taxable  year  a  net  income  of  $3,000 
or  more,  is  unless  exempt  under  Art.  13,  required  to 
make  a  return  and  pay  the  tax,  if  any.5 

4  See  Holmes  Income  Tax,  Ch.  23,  p.  262. 

5  There    is   no    express    provision    in    the   statute   requiring  cor- 


WAR   EXCESS   PROFITS   TAX 

Everj    foreign  corporation  which  has  for  the  taxable 
year  a  net  income  of  $3,000  or  more  from  sources  within 
the  United  States  is,  unless  exempl   under  Art.   L3,  re 
quired  to  make  a  return  and  to  pay  the  tax,  it'  any. 

Art.  11.  Partnerships. — Every  domestie  partnership 
which  has  for  the  taxable  year  a  ae1   income  of  $6,000 

in-  more  is,  unless  exempt  under  Art.  13,  required  to  make 
.1  return  and  to  pay  the  tax,  if  any. 

livery  foreign  partnership  which  lias  for  Hie  taxable 
year  a  net  income  of  $3,000  or  more  from  sources  within 
the  United  States  is,  unless  exempt  under  Art.  13,  re- 
quired  to  make  a  return  and  to  pay  the  tax,  if  any. 

Art.  12.  Individuals. — Every  citizen  or  resident  of 
the  United  States  who  has  for  the  taxable  year  an  aggri 
gate  net  income  in  excess  of  $6,000  from  trades,  busi- 
nesses, occupations  or  professions  is,  unless  exempl  under 
Art.  13,  required  to  make  a  return  and  to  pay  the  tax, 
if  any.5 

Every  nonresident  alien  individual  who  lias  for  the 
taxable  year  an  aggregate  net  income  of  $3,000  or  more 
from  trades,  businesses,  occupations,  or  professions  ear 
ried  on  within  the  United  States  is,  unless  exempt  under 
Art.  13,  required  to  make  a  return  and  to  pay  the  tax. 
if  any. 

Art.  13.  Exemptions. — The  following  are  exempt 
from  the  tax: 

in)   Corporations  exempt  under  the  provisions  of  See. 

porations  or  individuals  to  make  returns  separate  from  their  re- 
turns of  annual  net  'hum, me  for  the  purpose  of  this  tax,  but  under 
See.  213  of  the  act  the  Commissioner  of  Internal  Revenue  is  given 
the  authority  on  which  this  ruling  is  based.  The  time  for  filing 
excess  profits  tax  returns  has  been  extended  to  April  1,  1918.  (T. 
D.  2650).  As  to  corporations  dissolved  prior  to  the  passage  of  tin- 
law.     See  p.  f>74. 


75  I  KOLMES    INCOME   TAX    SI   PPLEMENT 

1  1  of  Title  I  of  the  act  of  September  8,  1916,  from  the 
tax  imposed  by  such  title.6 

(b)  Partnerships  carrying  un  or  doing-  the  same  kind 
of  business  or  coming  within  the  same  description. 

(c)  Individuals  to  the  extent  that  they  carry  on  or  do 
the  same  kind  of  business  or  come  within  the  same  de- 
scription. 

RATES    WD  COMPUTATION  OP  TAX 

Art.  14.  Classification  of  net  income. — For  the  pur- 
poses of  the  excess  profits  tax  net  income  which  is  sub- 
ject to  the  tax  shall  be  divided  into  two  classes,  as  fol- 
lows : 

A.  Net  income  which  is  derived  from  a  trade  or  busi- 
ness having  no  invested  capital,  or  not  more  than  a  nomi- 
nal capital,  including  in  the  case  of  an  individual  sala- 
ries, wages,  fees,  or  other  compensations;  and 

B.  Net  income  which  is  derived  from  a  trade  or  busi- 
ness having  invested  capital. 

In  the  case  of  a  corporation  or  partnership,  all  the 
trades  and  businesses  in  which  it  is  engaged  will  be 
treated  as  a  single  trade  or  business,7  and  its  entire  in- 
come will  be  held  to  be  of  the  same  class  as  the  income 
from  its  principal  trade  or  business. 

In  the  case  of  an  individual  the  net  income  subject  to 
the  excess  profits  tax  shall  be  classified  as  provided  in  this 
A  rticle.  Net  income  of  class  A  shall  be  taxed  as  provided 
in  Art.  15,  and  net  income  of  class  B  shall  be  taxed  as 
provided  in  Art.  16. 

Art.  15.  Rate  of  tax  on  income  of  class  A.— The  tax 
upon  net  income  of  class  A  as  defined  in  Art.  14  shall  be 

6  Sc  Holmes  Income  Tax,  Ch.  15,  p.  193. 

7  See  See.  201  of  the  Law. 


WAR    EXCESS    PROFITS   TAX  T.r).r) 

computed  at  the  rate  of  8  per  cent  upon  the  amount 
thereof  in  excess  of  $3,000  in  the  case  of  a  domestii  cor- 
poration; upon  the  amount  thereof  in  excess  of  $6,000 
in  the  case  of  a  domestic  partnership  or  of  a  citizen  or 
resident  of  the  United  States;  and  upon  the  whole  there- 
of in  the  case  of  a  foreign  corporation  or  partnership  or 
of  a  non-resident  <tli<  n  individual. 

Art.  16.  Rate  of  tax  on  income  of  class  B.  The  tax 
upon  ncl  income  of  class  Ii  as  defined  in  Art.  11  shall. 
except  as  otherwise  provided  in  Art.  17,  he  computed 
at  the  following  rates: 

20  per  cent  of  the  amount  of  the  net  income  in  excess 
of  the  deduction  (determined  as  provided  in  Articles  21, 
23,  and  24)  and  not  in  excess  of  15  per  cent  of  the  in- 
vested capital  for  the  taxable  year; 

25  per  cent  of  the  amount  of  the  net  income  in  excess 
of  15  per  cent  and  not  in  excess  of  20  per  cent  of  such 
capital; 

35  per  cent  of  the  amount  of  the  net  income  in  excess 
of  20  per  cent  and  not  in  excess  of  25  per  cent  of  such 
capital ; 

45  per  cent  of  the  amount  of  the  net  income  in  excess 
of  25  per  cent  and  not  in  excess  of  33  per  cent  of  such 
capital ; 

60  per  cent  of  the  amount  of  the  net  income  in  excess 
of  33  per  cent  of  such  capital. 

Illustrations. — (1)  A  corporation  has  a  capital  of 
$100,000,  prewar  earnings  of  7  per  cent,  and  a  net 
income  for  the  taxable  year  of  $75,000. 

The  deduction  allowed  will  be  7  per  cent  of  the  capital. 
or  $7,000,  plus  $3,000  specific  deduction,  a  total  of  $10,- 
000. 

The  amount  of  the  net  income  taxable  at  each  rate 

will  be  as  follows: 

P.I.  Tax  Supp. — 7 


756  HOLMES   INCOME   TAX   SUPPLEMENT 

Tn  excess  of  the  deduction  and  not  in  excess  of  15 

per  cenl  of  the  capital  (rate,  20  per  cent) ....   $5,000 

hi  excess  of  15  per  cent  of  the  capital  and  not  in 
excess  of  20  per  cent  thereof  (rate,  25  per  cent)     5,000 

In  excess  of  20  per  cent  of  the  capital  and  not  in 
excess  of  25  per  cent  thereof  (rate,  35  per  cent)     5,000 

In  excess  of  25  per  cent  of  the  capital  and  not  in 
excess  of  33  per  cent  thereof  (rate,  45  per  cent)     8,000 

In  excess  of  33  per  cent  of  the  capital  (rate,  60 

per  cent)   42,000 

The  tax  would  then  be  computed  as  follows : 

20  per  cent  of  $5,000 $  1,000 

25  per  cent  of     5,000 1,250 

35  per  cent  of    5,000 1,750 

45  per  cent  of    8,000 3,600 

60  per  cent  of  42,000 25,200 

Total  tax. $32,800 

(2)  An  individual  or  partnership  has  a  capital  of 
$100,000,  prewar  earnings  of  8  per  cent,  and  a  net  in- 
come for  the  taxable  year  of  $22,500. 

The  deduction  allowed  will  be  8  per  cent  of  the  capital, 
or  $8,000,  plus  $6,000  specific  deduction,  a  total  of  $14,- 
000. 

The  amount  of  the  net  income  taxable  at  each  rate  will 
be  as  follows: 

In  excess  of  the  deduction  and  not  in  excess  of  15 
per  cent  of  the  capital  (rate,  20  per  cent) $1,000 

I  ii  excess  of  15  per  cent  of  the  capital  and  not  in 
excess  of  20  per  cent  thereof  (rate,  25  per  cent)     5,000 

In  excess  of  20  per  cent  of  the  capital  and  not  in 

excess  of  25  per  cent  thereof  (rate,  35  per  cent)     2,500 


WAR   EXCESS   PROFITS   TAX  757 

The  tax  would  then  lie  computed  as  follows: 

l'ii  per  cenl  of  +1,000 $   200 

25  per  cent  of    5,000 1,250 

35  per  cenl  of    2,500. 875 

Total  tax $2,325 

Art.  17.  When  deduction  exceeds  15  per  cent  of  in- 
vested capital.—  In  any  case  in  which  the  deduct  ion  de- 
termined  as  provided  in  articles  21,  23  and  21  is  greater 

than  15  per  cent  of  the  invested  capital  and  therefore  can 
not  he  fully  allowed  under  the  first  rate  or  bracket  of 
Art.  1(>.  then  any  remaining  portion  of  the  deduction  will 
be  allowed  under  the  second  bracket,  and  continued  if 
necessary  into  the  succeeding  bracket  or  brackets  until 
the  entire  amount  of  the  deduction  is  allowed. 

Illustrations. — (1)  A  corporation  has  a  capital  of 
$9,000;  prewar  earnings  of  9  per  cent:  and  a  net  income 
for  the  taxable  year  of  $10,000. 

The  deduction  allowed  will  be  9  per  cent  of  the  capital. 
or  $810,  plus  $3,000  specific  deduction,  a  total  of  $3,810. 

The  amount  of  the  net  income  in  each  bracket  will  be 
as  follows: 

15  per  cent  of  the  capital $1,350 

In  excess  of  15  per  cent  of  the  capital  and  not  in 

excess  of  20  per  cent  thereof .  450 

In  excess  of  20  per  cent  of  the  capital  and  not  in 

excess  of  25  per  cent  thereof 450 

In  excess  of  25  per  cent  of  the  capital  and  not  in 

excess  of  33  per  cent  thereof 7l!i> 

[n  excess  of  33  per  cent  of  the  capital 7,030 

It  is  evident  Ilia  I  1  lie  total  deduction  of  $3,810  is 
greater  than  15  per  cent  of  the  capital  and  so  is  not  fully 


758  HOLMES   INCOME   TAX   SUPPLEMENT 

absorbed  by  the  amount  of  net  income  not  in  excess  of 
15  per  cent  of  the  capital.  In  such  case,  applying  Art. 
17,  the  total  deduction  of  $3,810  will  be  distributed  as 
follows : 

$1,350  in  the  first  bracket,  leaving  nothing  to  be 

taxed  at  the  20  per  cent  rate. 
$450  in  the  second  bracket,  leaving  nothing  to  be 

taxed  at  25  per  cent  rate. 
$450  in  the  third  bracket,  leaving  nothing  to  be 

taxed  at  the  35  per  cent  rate. 
$720  in  the  fourth  bracket,  leaving  nothing  to  be 

taxed  at  the  45  per  cent  rate. 

There  still  remains  $840  of  the  deduction  to  be  allowed 
in  the  fifth  bracket  against  the  $7,030  of  income  which 
would  otherwise  be  taxable  under  that  bracket.  There 
would  then  be  $6,190  of  net  income  left  to  be  taxed  at  60 
per  cent  rate  under  the  fifth  bracket.  Hence,  the  total 
excess-profits  tax  in  this  case  would  be  $3,714. 

(2)  An  individual  or  partnership  has  a  capital  of 
$40,000,  prewar  earnings  of  9  per  cent,  and  a  net  income 
for  the  taxable  year  of  $12,000. 

The  deduction  allowed  will  be  9  per  cent  of  the  capital, 
or  $3,600,  plus  $6,000  specific  deduction,  a  total  of  $9,- 
600. 

The  amount  of  the  net  income  in  each  bracket  will  be 
as  follows: 

15  per  cent  of  the  capital $6,000 

In  excess  of  15  per  cent  of  the  capital  and  not  in 

excess  of  20  per  cent  thereof 2,000 

Tn  excess  of  20  per  cent  of  the  capital  and  not  in 

excess  of  25  per  cent  thereof 2,000 

In  excess  of  25  per  cent  of  the  capital  and  not  in 

excess  of  33  per  cent  thereof 2,000 


WAR  EXCESS   PROFITS   TAX 

Jt  is  evident  that  the  total  deduction  of  $9,600  is 
greater  than  15  per  cent  of  the  capital  and  so  is  not  fully 
absorbed  by  the  amount  of  net  income  not  in  excess  of 
15  per  cent  of  the  capital.  In  such  case,  applying  Art. 
17,  the  total  deduction  of  $9,600  will  be  distributed  as 
follows : 

$6,000  in  the  first  .bracket,  leaving  nothing  to  be 

taxed  at  the  20  per  cent  rate. 
$2,000  in  the  second  bracket,  leaving  nothing  to  be 

taxed  at  the  25  per  cent  rate. 
$1,600,  the  balance  of  the  deduction,  to  be  allowed 

against  the  $2,000  of  income  in  the  third  bracket. 

There  would  then  be  $400  of  income  left  in  the  third 
bracket  to  be  taxed  at  the  35  per  cent  rate,  and  $2,000 
in  the  fourth  bracket  to  be  taxed  at  the  45  per  cent  rate. 
Hence,  the  total  excess-profits  tax  in  this  case  would  be 
$1,040. 

Art.  18.  Constructive  capital  for  application  of  rates. 
— Where  the  deduction  allowed  to  a  taxpayer  is  deter- 
mined under  Art.  24,  the  invested  capital  for  the  pur- 
pose of  applying  the  rates  of  taxation  under  Art.  16 
shall  be  deemed  to  be  an  amount  which  bears  the  same 
ratio  to  the  net  income  of  the  trade  or  business  for  the 
taxable  year  which  the  average  invested  capital  for  the 
corresponding  calendar  year  of  representative  corpora- 
tions, partnerships,  and  individuals  engaged  in  a  like  or 
similar  trade  or  business  bears  to  their  average  net  in- 
come. 

The  Commissioner  of  Internal  Revenue  in  determining 
for  any  calendar  year  the  ratio  which  the  average  in- 
vested capital  of  representative  corporations,  partner- 
ships, and  individuals  engaged  in  any  particular  trade 
or  business  bears  to  their  average  net  income,  will  in- 


760  HOLMES   INCOME   TAX   SUPPLEMENT 

elude  the  invested  capital  and  net  income  of  represen- 
tative corporations  and  partnerships  for  fiscal  years  end- 
ing during  such  calendar  year. 

For  the  purpose  of  applying  this  article  in  the  case  of 
a  corporation  or  partnership  which  has  fixed  its  own  fis- 
e;il  year,  the.  ratio  determined  for  the  calendar  year  end- 
ing during  such  fiscal  year  shall  be  used. 

Art.  19. — Computation  of  tax  for  fiscal  year,  part  of 
which  falls  within  calendar  year  1916. —  If  a  cor  pern- 
lion  or  partnership  prior  to  March  1,  1D18,  makes  a  re- 
turn for  a  fiscal  year,  part  of  which  falls  within  the 
calendar  year  1916,  the  tax  for  the  first  taxable  year 
shall  be  that  proportion  of  the  tax  computed  upon  the 
net  income  for  such  fiscal  year  which  the  number  of 
months  from  January  1,  1f)17,  to  the  end  of  such  fiscal 
year  bears  to  the  entire  number  of  months  in  such  fiscal 
year. 

Art.  20.  Computation  of  tax  for  period  of  less  than 
12  months. — If  a  corporation  or  partnership  at  any 
time,  either  because  it  has  just  designated  a  fiscal  year 
as  provided  in  Sections  8  or  13  of  the  act  of  September 
8 ,  1916  8  or  for  any  other  reason,  makes  a  return  for  a 
period  of  less  than  12  months,  the  deduction  will  be  an 
amount  which  bears  the  same  ratio  to  the  deduction  al- 
lowable for  a  full  year  as  the  number  of  months  in  such 
period  bears  to  12  months. 

COMPUTATION  OP  THE  DEDUCTION 

Art.  21.  Trade  or  business  having-  invested  capital. — 

The  deduction  used  in  computing  the  rates  of  tax  under 
Art.  16  shall,  except  in  cases  coming  within  the  condi- 
tions specified  in  Articles  23  and  24,  be  as  follows: 

8  See   Holmes  Income  Tax,  Cli.  12,  p.  153. 


\\  \i;    l  SCESS    PROFITS   TAX  T I i  1 

(a)  in  the  case  of  a  domestic  corporation  the  sum  of 
(1)  .in  amount  equal  to  the  same  percentage  of  the  in- 
vested capital  for  the  taxable  year  which  the  average 
amount  of  the  annua]  aet  income  of  the  trade  or  business 
during  the  prewar  period  was  of  the  invested  capital  for 
the  prewar  period  (excepl  thai  7  per  cenl  shall  be  used 
if  such  percentage  was  less  than  7  per  cent,  and  9  per 
cent,  shall  be  used,  if  such  percentage  was  more  than  9 
per  cent,  and  8  per  eenl  shall  be  used  if  the  corporation 
was  not  in  existence  during  the  whole  of  al  least  one  cal- 
endar year  during  the  prewar  period9),  and  (2)  $;{,()()(). 

(b)  In  the  case  of  a  domestic  partm  rship  or  of  a  citi- 
zen or  resident  of  the  United  States,  the  sum  of  (1)  an 
amount  equal  to  the  same  percentage  of  the  invested  cap- 
ital for  the  taxable  year  which  the  average  amount  of 
the  annual  net  income  <d"  the  trade  or  business  during  the 
prewar  period  was  of  the  invested  capital  for  the  prewar 
period  (excepl  that  7  per  cent  shall  he  used  if  such 
percentage  was  less  than  7  per  cent,  and  !*  per  cent  shall 

he  used  if  such  percentage  was  more  than  !)  per  cent. 
and  8  per  cent  shall  lie  used  it'  the  partnership  was  not 
in  existence  or  the  individual  was  not  engaged  in  the 
trade  or  business  during  the  whole  of  at  least  one  calen- 
dar year  during  the   prewar  period,9)   and   (2)   $6,000 

(c)  In  the  case  of  a  foreign  corporation  or  /><trtn<r- 
ship  or  of  a  non-resident  <ili<>i  individiial,  an  amount 
equal  to  the  same  percentage  of  the  invested  capital  for 
the  taxable  year  which  the  average  amount  of  the  annual 
net  income  of  the  trade  or  husiness  during  the  prewar 
period  was  of  the  invested  capital  for  the  prewar  period 
(excepl  that  7  per  cent  shall  be  used  if  such  percentage 
was  less  than  7  per  cent,  and  !)  per  cenl  shall  be  used  if 

9  Except  in  the  cases  covered  by  Art.  22. 


V(JL>  HOLMES   INCOME    TAX   SUPPLEMENT 

such  percentage  was  more  than  9  per  cent;  and  8  per 
cent  shall  he  used  if  the  corporation  or  partnership  was 
no!  in  existence  or  the  individual  was  not  engaged  in  the 
i  rade  or  business  during  the  whole  of  at  least  one  calen- 
dar  year  during  the  prewar  period9). 

Art.  22.  Trade  or  business  reorganized  on  or  after 
January  2,  1913. — If  a  trade  or  business;  carried  on  by  a 
corporation,  partnership  or  individual  was  formally  or- 
ganized or  reorganized  on  or  after  January  2,  1913,  but 
is  substantially  a  continuation  of  a  trade  or  business  car- 
ried on  prior  to  that  date,  then  the  corporation  or  part- 
nership shall  be  deemed  to  have  been  in  existence,  or  the 
individual  shall  be  deemed  to  have  been  engaged  in  the 
trade  or  business,  prior  to  that  date,  and  for  the  purpose 
of  computing  the  deduction  the  net  income  and  invested 
capital  of  the  predecessor  shall  be  deemed  to  have  been 
the  net  income  and  invested  capital  of  the  present  owner 
for  the  prewar  period.10 

Art.  23.  When  income  for  prewar  period  cannot  be 
satisfactorily  determined,  or  when  net  income  was  low 
during  prewar  period,  or  when  there  was  no  net  income 
during  prewar  period. — In  the  following  cases  the  de- 
duction shall  be  determined  as  provided  in  this  article: 

(a)  If  the  Secretary  of  the  Treasury  is  unable  satis- 
factorily to  determine  the  average  amount  of  annual  net 
income  of  the  trade  or  business  for  the  prewar  period ; 

(6)  If  the  Secretary  of  the  Treasury  upon  complaint 
finds  that  during  the  prewar  period  the  percentage  of 
the  net  income  to  the  invested  capital  of  the  taxpayer 
was  lower  by  1  per  cent  or  more  u  than  the  percentage  of 

10  The  invested  capital  of  the  predecessor  has  no  bearing  on  the 
invested  capital  for  the  taxable  year.     See  Art.  49. 

11  The  Law  says  "was  low  as  compared  with."  It  is  doubtful 
if  relief  can  be  withheld  under  the  law  in  cases  where  the  vari- 


W  \i;    EXCESS    PBOPITS   r\.\  .  li:: 

the  net  income  to  the  invested  capital  of  representative 
corporations,  partnerships  or  individuals  engaged  in  a 
like  or  similar  trade  or  business  during  the  same  period ; 
or 

(c)  If,  in  the  case  only  of  a  domestic  corporation  or 
partnership  which  was  in  existence  during  the  prewar 
period,  or  of  a  citizen  or  resident12  of  the  United  States 
who  was  engaged  in  the  trade  or  business  during  the  pre- 
war period,  the  Secretary  of  the  Treasury  upon  com- 
plaint finds  that  during  the  prewar  period  there  was  no 
net  income  from  the  trade  or  business. 

In  such  cases  the  deduction  shall  be — 

(1)  An  amount  equal  to  the  same  percentage  of  the 
invested  capital  for  the  taxable  year  which  the  average 
deduction  (determined  in  the  same  manner  as  provided 
in  Art.  21,  without  including  the  $3,000  or  $6,000  therein 
referred  to)  for  such  year  of  representative  corporations. 
partnerships,  or  individuals  engaged  in  a  like  or  similar 
trade  or  business,  is  of  their  average  invested  capital  D>r 
such  year,  plus  13 

(2)  In  the  case  of  a  domestic  corporation,  $3,000,  and 

ation  is  less  than  1%,  and  this  ruling  might  be  modified   in   ex 
ceptional  cas<'-. 

12  So  limited  by  the  language  of  the  statute.  This  provision 
has  particular  application  to  development  companies  and  to  min- 
ing companies  and  similar  enterprises  requring  a  long  period 
of  development  before  the  stage  of  production  is  reached. 

13  To  illustrate:  if  the  average  deduction  of  coal  mining  COD 
cerns  in  the  same  vicinity  and  operating  under  substantially  the 
-.line  londitons  of  transportation  and  marketing  is  9%  for  the 
taxable  year,  the  same  rate  -would  be  allowed  to  a  mining  con- 
cern which  during  the  prewar  period  wa£,  for  instance,  engaged 
in  developing  its  property  and  had  no  net  income  or  had  not 
reached  the  point  of  full  production  and.  therefore,  had  an  in- 
come "low  as  compared  with"  other  representative  mining  con- 
cerns at  that  time. 


764  HOLMES    [NCOMB   TAX   SUPPLEMENT 

in  the  case  of  a  domestic  partnership  or  a  citizen  or  resi- 
cU  at  of  the  United  Slates,  $6,000. 

In  cases  arising  under  subdivision  (a)  or  (c)  of  this 
article  the  tax  shal]  be  assessed  in  the  first  instance  upon 
the  basis  of  a  deduction  computed  by  the  use  of  7  per 
cent.  In  cases  arising'  under  subdivision  (&)  the  tax 
shall  be  assessed  in  the  first  instance  upon  the  basis  of  a 
deduction  determined  as  provided  in  Art.  21. 

In  any  case  under  this  article  a  taxpayer  claiming  the 
benefit  of  this  provision  shall  at  the  time  of  making  the 
return  file  a  claim  for  abatement,  (Form  47)  of  the 
amount  by  which  the  tax  so  assessed  exceeds  a  tax  com- 
puted upon  the  basis  of  the  deduction  determined  as  pro- 
vided in  this  article.  In  cases  coming  within  the  pro- 
visions of  this  article  payment  of  that  portion  of  the  tax 
covered  by  the  claim  for  abatement  will  not  be  required 
tmtil  the  claim  is  decided.  If,  however,  in  the  judgment 
of  the  Commissioner  or  Internal  Revenue  the  interests  of 
the  United  States  would  be  jeopardized  thereby,  the 
right  is  reserved  to  require  the  claimant  to  give  a  bond 
of  such  amount  and"  with  such  sureties  as  the  commis- 
sioner thinks  wise  to  safeguard  such  interests.  The  bond 
shall  be  conditioned  for  the  payment  of  any  tax  found 
to  be  due  with  interest  thereon,  and  if  a  bond  satisfac- 
tory to  the  commissioner  is  not  given  within  such  time 
as  he  prescribes,  the  full  amount  of  the  tax  assessed  will 
become  immediately  due  and  the  amount  overpaid,  if 
any,  will  upon  final  decision  of  the  application,  be  re- 
funded as  a  tax  erroneously  or  illegally  collected. 

Art.  24.  When  invested  capital  cannot  be  satisfac- 
torily determined. — If  the  Secretary  of  the  Treasury  is 
unable  satisfactorily  to  determine  the  invested  capital, 
the  deduction  shall  be  the  sum  of — 

(1)   An  amount  equal  to  the  same  proportion  of  the 


W  \l;    EXCESS   PEOPITS   TAX  7<i.~> 

nut  income  of  the  trade  or  business  for  the  taxable  year 
as  the  average  deduction  (determined  in  the  same  man- 
ner as  provided  in  Art.  21  without  including  the  $3,000 
or  $6,000  therein  referred  to)  for  the  corresponding 
calendar  year,  or  representative  corporations,  partner- 
ships, and  individuals  engaged  in  a  like  or  similar  trade 
or  business,  is  of  their  average  net  income,  plus 

(2)  In  the  case  of  a  domestic  corporation  $3,000,  and 
in  the  case  of  a  domestic  partnership  or  a  citizen  or  resi- 
dent of  the  United  States,  $6,000.14 

The  Commissioner  of  Internal  Revenue  in  determining 
for  any  calendar  year  the  proportion  which  the  average 
deduction  of  representative  corporations,  partnerships, 
and  individuals  engaged  in  any  particular  trade  or  busi- 
ness is  of  their  average  net  income,  will  include  the  de- 
ductions and  net  income  of  representative  corporations 
and  partnerships  for  fiscal  years  ending  during  such  cal- 
endar year. 

For  the  purpose  of  applying  this  article  in  the  case 
of  a  corporation  or  partnership  which  has  fixed  its  own 

14  See  Sec.  210  of  the  Law.  This  provision  relieve^  the  tax- 
payer who  through  faulty  accounting  methods  is  unable  to  as- 
certain  the  amount  of  invested  capital  in  the  business.  Wide 
latitude  is  given  to  the  Secretary  of  the  Treasury  in  the  use  of 
this  method.  In  a  trade  in  which  there  are  many  operators  who 
do  not  keep  books  according  to  the  recognized  systems  of  ac- 
counting,  the  average  return  on  invested  capital  may  l>e  as- 
certained among  the  representative  concerns  and  also  the  ratio  of 
deduction  to  income,  which  may  thereupon  be  applied  to  all  others 
in  that  industry  whose  invested  capital  cannot  be  satisfactorily 
determined.  Thus,  if  the  average  return  on  invested  capital  is 
found  to  be  20%  and  the  average  deduction  is  found  to  be  25'  ! 
of  the  net  income  for  that  taxable  year,  one  whose  income  was 
$36,000  would  be  entitled  to  a.  deduction  of  $9,000— and  the  aver 
age  return  on  invested  capital  being  20%,  his  "invested  capital" 
would  be  arbitrarily  6xed  at   $iso,O00.    See  Art.  18. 


,1)1,  HOLMES    [NCOME    TAX   SUPPLEMENT 

fiscal  year,  the  proportion  determined  for  the  calendar 
year  ending  during  such  fiscal  year  shall  be  used. 

In  every  case  or  a  trade  or  business  having  invested 
capital  a  return  shall  be  made  in  the  first  instance  in  ac- 
eordance  with  Art.  21  or  23,  but  the  taxpayer  may  sub- 
mit therewith  a  statement  of  reasons  why  in  his  opinion 
the  tax  should  be  assesed  in  accordance  with  this  article. 

NET    INCOME GENERAL   PROVISIONS 

Art.  25.  Exemptions. — The  following  classes  of  in- 
come are  exempt  from  the  tax : 

(a)  Income  exempt  from  taxation  under  Sec.  4  of  the 
act  of  September  8,  1916,  as  amended.15 

(b)  Income  derived  from  the  business  of  life,  health, 
and  accident  insurance  combined  in  one  policy  issued  on  a 
weekly  premium  payment  plan. 

(c)  Compensation  or  fees  received  by  officers  and  em- 
ployees under  the  United  States  or  any  State,  Territory, 
or  the  District  of  Columbia  for  their  services  as  such.16 

Art.  26.  Net  income  of  foreign  corporations,  part- 
nerships, and  non-resident  alien  individuals. — In  the 
case  of  a  foreign  corporation  or  partnership  or  a  non-resi- 
dent alien  individual  the  net  income  shall  be  the  net  in- 
come from  sources  within  the  United  States. 

Art.  27.  Dividends  received  from  a  foreign  corpora- 
tion which  is  subject  to  Federal  income  tax. — In  the 
case  of  income  derived  by  a  corporation  or  partnership 
from  dividends  upon  the  stock  of  a  foreign  corporation, 
part  of  whose  net  income  is  subject  to  the  income  tax, 
there  shall  be  deducted  only  that  proportion  of  the  divi- 

15  See  Holmes  Income  Tax,  Ch.  16,  p.  226. 

16  Salaries  of  Congressmen  have  been  held  not  to  be  exempt 
under  this  provision,  on  the  ground  that  Congressmen  are  neither 
officers  nor  employees  of  the  United  States. 


WAR   EXCESS   PROFITS   TAX  767 

dends  received  upon  such  stock  which  the  net  income  of 
such  foreign  corporation  train  sources  within  ihc  United 

Slates  is  of  its  entire  net  income.17 

Where  dividends  upon  the  stock  of  a  foreign  corpora- 
tion are  received  by  an  individual,  as  a  part  of  his  income 
from  trade  or  business,  there  shall  lie  included  in  the  net 
income  that  proportion  of  the  dividends  received  upon 
such  stock  which  the  net  income  of  such  corporation  from 
sources  outside  the  United  States  is  of  its  entire  net  in- 
come. 

NET    INCOME) — CORPORATIONS 

Art.  28.  Taxable  year. — The  net  income  of  a  corpo- 
ration for  the  taxable  year  shall  be  determined  by  adding 
(1)  the  amount  of  net  income  ascertained  and  returned 
for  income  tax  purposes  for  such  taxable  year  as  pro- 
vided in  Title  1  of  the  act  of  September  8,  1916,  as 
amended  and  (2)  the  amount,  if  any,  received  as  inter- 
es1  on  bonds  or  other  obligations  of  the  United  States, 
issued  after  September  24,  1917  (other  than  the  interest 
received  on  an  amount  of  such  bonds  or  obligations  the 
aggregate  principal  of  which  does  not  exceed  $5,000), 18 
and  deducting  from  the  total  so  obtained  the  amounts  re- 
ceived during  the  taxable  year  as  dividends  upon  the 
stock  or  from  the  net  earnings  of  other  corporations, 
joint-stock  companies  or  associations,  or  insurance  com- 
panies, subject  to  the  income  tax  imposed  by  Title  I  of 
such  act  of  September  8,  1916,  as  amended,  except  as 
otherwise  provided  in  Art.  27.19 

17  See  Holmes  Income  Tax,  Ch.  23,  p.  264. 

18  See  Holmes  Income  Tax,  Ch.  22,  p.  256. 

19  Dividends  may  be  deducted  if  the  corporation  from  which 
they  were  received  is  subject  to  the  income  tax  whether  or  not 
it  is   subject  to   the  excess  profits  tax  and  whether  or  not  the 


768  HOLMES   INCOME   TAX  SUPPLEMENT 

Art.  29.  Prewar  period.— The  net  income  of  a  corpo- 
ration for  the  prewar  period  shall  be  computed  as  fol- 
lows : 

(a)  For  the  calendar  year  1911  by  adding  (1)  the 
amount  of  net  income  shown  in  item  9  of  the  return 
made  under  Sec.  38  of  the  act  of  August  5,  1909,  for  the 
calendar  year  1911,  and  (2)  the  amount  of  taxes  paid 
to  the  United  States  within  the  calendar  year  1911  under 
Sec.  38  of  such  act ;  20 

(b)  For  the  calendar  year  1912  by  adding  (1)  the 
amount  of  net  income  shown  in  item  9  of  the  return  made 
under  Sec.  38  of  the  act  of  August  5,  1909,  for  the  calen- 
dar year  1912,  and  (2)  the  amount  of  taxes  paid  to  the 
United  States  within  the  calendar  year  1912  under  Sec. 
38  of  such  act ;  and 

(c)  For  the  calendar  year  1913  by  adding  (1)  the 
amount  of  the  entire  net  income  shown  in  item  8  of  the 
return  made  under  Sec.  II  of  the  act  of  October  3,  1913, 
for  the  calendar  year  1913,  and  (2)  the  amount  of  taxes 
paid  within  the  calendar  year  1913  under  Sec.  38  of  the 
act  of  August  5,  1909,  and  Sec.  II  or  IV  of  the  act  of 
October  3,  1913,  and  deducting  from  the  total  so  obtained 
the  amounts  received  during  the  calendar  year  1913  as 
dividends  upon  the  stock  or  from  the  net  earnings  of 
other  corporations,  joint  stock  companies  or  associations, 

dividends  are  from  earnings  of  the  year  1917  or  from  preceding 
years.  Dividends  from  foreign  corporations  may  be  deducted 
if,  and  to  the  extent  that  the  foreign  corporation  is  subject  to 
the  income  tax.     See  Art.   27. 

20  Tinder  the  1909  and  1913  Laws  corporations  were  permitted 
to  deduct  the  amount  of  such  taxes  paid  to  the  United  States. 
Under  the  present  laws  income  taxes  cannot  be  deducted.  Hence, 
for  the  purpose  of  comparing  the  average  income  for  the  prewar 
period  with  the  income  for  the  taxable  year,  the  amount  of  such 
taxes  are  restored  to  the  income  account  of  the  prewar  yeara. 


WAB    EXCESS    PROFITS   TAX  769 

or  insurance  companies,  subject  to  the  income  tax  im- 
posed by  Sec.  II  oftheacl  of  October  3, 1913. 

NET   IM'iiMi;      PARTNERSHIPS 

Art.  30.  Taxable  year.  The  net  income  of  a  part- 
nership for  the  taxable  year  shall  be  determined  by  add- 
ing the  amount  of  its  entire  ne1  income  (or  in  the  case  of 
a  foreign  partnership,  its  entire  ae1  income  from  sources 
within  the  United  States)  ascertained  upon  ihe  same 
basis  and  in  the  same  maner  as  provided  with  respect 
to  individuals  for  income-tax  purposes  by  Title  I  of  the 
act  of  September  8,  1916,  as  amended,81  including  the 
amounts,  it'  any,  received  during  the  year  as  interest  on 
bonds  or  other  obligations  of  the  United  States  issued 
after  September  24.  1917  (other  than  the  interest  on  an 
amount  of  such  bonds  or  obligations,  the  aggregate  prin- 
cipal of  which  does  not  exceed  $5,000),  and  deducting 
therefrom — 

(1)  The  amounts  received  during  the  taxable  year  as 
dividends  upon  the  stock  or  from  the  net  earnings  of 
corporations,  joint-stock  companies  or  associations,  or 
insurance  companies,  subject  to  the  income  tax  imposed 
by  Title  I  of  the  ad  of  September  8,  1916.  as  amended, 
excepl  as  otherwise  provided  in  Art.  27:  and 

(2)  The  deductions,  if  any,  for  salaries  or  interest  al- 
lowed by  Articles  32  and  33,  if  such  deductions  have  not 
already  been  made. 

Art.  31.  Prewar  period. — The  net  income  of  a  part- 
nership for  each  of  the  calendar  years  1911,  1912.  and 
L913  shall  be  determined  in  the  same  manner  as  the  net 
income  for  the  taxable  year,  excepl  that  dividends  upon 
the  stock  or  from  the  net  earnings  of  corporations,  joint 

Sl  See  Eolmes  Encome  Tax,  C'li.  4  and  Cb.  5. 


770  HOLMES   INCOME    TAX    SUPPLEMENT 

stock  companies  or  associations,  or  insurance  companies, 
subjecl  to  I  lie  tax  imposed  by  Sec.  38  of  the  act  of  August 
5,  1909,  or  by  Sec.  II  of  the  act  of  October  3,  1913,  shall 
be  deducted.22 

Art.  32.  Deductions  allowed  for  salaries  paid  to  part- 
ners.— -In  computing  net  income  for  purposes  of  the  ex- 
cess profits  tax  a  partnership  will  be  allowed  to  deduct 
as  an  expense  reasonable  salaries  or  compensation  paid 
to  individual  partners  for  personal  services  actually  ren- 
dered during  the  taxable  year,  if  the  payments  are  made 
in  accordance  with  prior  agreements  and  are  properly  re- 
corded on  the  books  of  the  partnership.  In  no  case  shall 
the  salaries  or  compensation  so  deducted  be  in  excess  of 
the  salaries  or  compensation  customarily  paid  for  similar 
services  under  like  responsibilities  by  corporations  en- 
gaged in  like  or  similar  trades  or  businesses. 

With  respect  to  any  period  prior  to  March  1,  1918, 
regardless  of  whether  a  previous  agreement  has  been 
made  as  to  salaries  or  compensation,  a  similar  deduction 
\\ill  be  allowed  for  services  actually  rendered.23 

In  the  case  of  a  foreign  partnership  the  deduction  shall 
lie  limited  to  those  portions  of  salaries  or  compensation 
which  are  paid  for  services  rendered  with  respect  to  trade 
or  business  carried  on  in  the  United  States. 

22  The  deductions,  allowances  and  exemptions  to  be  taken  in 
computing  net  income  for  the  prewar  period  as  well  as  for  the 
taxable  year,  are  determined  by  the  1916  Income  Tax  Law. 

23  For  the  year  1917  a  partnership  may  deduct  a  reasonable 
amount  for  each  partner,  calling  it  salary,  whether  or  not  such 
;nnount  has  been  paid  or  agreed  to  be  paid,  but  in  the  future 
such  deductions  will  be  allowed  only  where  salary  payments  to 
partners  arc  made  in  accordance  with  agreements  recorded  on 
the  books  of  the  partnership.  To  obtain  the  benefit  of  such  de- 
ductions agreements  should  at  once  be  made  for  future  payments 
of  salaries  to  partners. 


WAR   EXCESS    PROFITS   TAX  771 

A  partner  in  his  individual  capacity  is,  however,  suh- 
jecl  to  the  excess  profits  lax.  if  anj  .  at  the  8  per  cenl  rate 
under  Art.  L5  with  respeel  to  anj  salary  or  compensation 
from  the  partnership  for  personal  services  (including 
an\  amounts  allowed  to  the  partnership  as  a  deduction 

no  his  account  for  the  period  prior  In  March  1,  1918).24 
Art.  33.  Deductions  allowed  for  interest  on  bona  fide 
loans  by  partners. — In  computing  net  income  for  pur- 
poses of  the  excess  profits  tax  a  partnership  will  be  al- 
lowed to  deduct  amounts  paid  during  the  year  to  an 
individual  partner  as  interest  upon  any  bona  fide  loan. 
hut  no  deduction  for  so-called  interest  upon  capital  will 
he  allowed. 

Art.  34.  If  deduction  is  made  under  Art.  32  or  33, 
corresponding  deduction  must  also  be  made  for  prewar 
period. —  If,  in  computing  net  income  for  purposes  of 
i  he  excess  profits  lax.  a  partnership  makes  a  deduction 
as  allowed  by  Art.  32  for  salaries  paid  to  partners  during 
the  taxable  year,  it  must  also  in  computing  net  income 
for  the  prewar  period  make  a  corresponding  deduction; 
and  if  il  makes  such  a  deduction  as  allowed  by  Art.  33 
for  interest  paid  to  partners,  it  must  also  in  computing 
nel  inroiiie  for  the  prewar  period  make  a  corresponding 
deduction  for  any  such  interest  actually  paid  during  that 
period. 

\i  T   IM  0ME     -INDIVTOTJ  LLS 

Art.  35.  Determination  of  net  income  where  there  is 
no  invested  capital  or  only  nominal  capital. — The  net 

income  which  is  derived  from  a  trade  or  business  having 

84 The  partner  is  nut   subject  to  excess  profits  tax  on  his  share 
<a'   the   net    profits   of   the  partnership,  on   which  the  partnership 
has  paid  the  tax.     See  Art.  41. 
F.  I.  Tax Supp—  8 


772  HOLMES    INCOME    TAX   SUPPLEMENT 

no  invested  capital  or  nol  more  Hum  a  nominal  capital, 
including  salaries,  wages,  fees  or  other  compensations 
(constituting  net  income  of  class  A  as  defined  in  Art. 
14)  shall  be  determined  for  the  taxable  year  by  adding 
the  total  net  income  from  all  such  sources  (or  in  the  case 
of  a  non-resident  alien  individual  the  total  net  income 
from  all  snch  sources  within  the  United  States)  as  re- 
ported  I'm'  income  tax  purposes  for  the  same  year. 

Art.  36.  Determination  of  net  income  for  taxable 
year  when  there  is  invested  capital. — The  net  income 
which  is  derived  from  a  trade  or  business  having  in- 
vested capital  (constituting  net  income  of  class  B,  as  de- 
fined in  Art.  14)  shall  be  determined  for  the  taxable  year 
by  adding  the  total  net  income  from  such  sources  (or  in 
the  case  of  a  non-resident  alien  individual  the  total  net 
income  from  such  sources  within  the  United  States)  as 
reported  for  income  tax  purposes  for  the  same  year  and 
deducting  therefrom  the  deduction,  if  any,  for  salary 
allowed  by  Art.  39,  if  such  deduction  has  not  already 
been  made. 

There  shall  be  excluded  the  amounts  received  during 
the  year  upon  the  stock  or  from  the  net  earnings  of  cor- 
porations, joint-stock  companies  or  associations,  or  insur- 
ance companies,  subject  to  the  income  tax  imposed  by 
Title  I  of  the  act  of  September  8,  1916,  as  amended. 

In  the  case,  however,  of  an  individual  dealing  in  securi- 
ties or  otherwise  using  securities  in  trade  or  business 
there  shall  be  included  (1)  the  amount,  if  any,  received 
as  interest  on  bonds  or  obligations  of  the  United  States, 
issued  after  September  24,  1917  (other  than  the  interest 
received  on  an  amount  of  such  bonds  or  obligations  the 
aggregate  principal  of  which  does  not  exceed  $5,000), 
and  (2)  such  proportion  of  dividends  received  upon  the 
slock  of  foreign  corporations  as  is  required  to  be  included 
by  Art.  27. 


WAR    EXCESS    PROFITS   TAX  773 

Illustrations.  An  individual  owns  a  farm  represent- 
ing an  invested  capital  of  $25,000,  a  country  store  with 
;ni  invested  capital  of  $6,000,  and  a  flour  mill  with  an 
invested  capital  of  $10,000.  His  net  income  from  the 
farm  is  $4,000,  from  the  store  $3,000,  and  from  the  mill 
$3,000.  Thus  his  total  net  income  of  class  B  is  $10,000. 
1 1  is  total  invested  capital  is  $41,000.  Assuming  thai  his 
deduction  is  at  the  rate  of  8  per  cent  his  total  deduction 
will  he  $3,280  plus  $6,000,  or  $9,280,  to  be  applied  againsl 
his  net  income  of  $10,000  in  computing  the  tax  at  the 
graduated  rates  under  Articles  16  and  17. 

The  same  individual  allows  himself  a  salary  of  $1,000 
for  working  the  farm  and  $900  for  running  the  store, 
draws  a  salary  of  $1,200  as  president  of  the  local  bank, 
and  receives  $250  in  compensation  for  personal  services 
of  various  kinds,  such  as  road  work,  helping  neighbors 
in  harvest,  etc.  He  also  receives  $300  in  dividends  on  an 
investment  in  certain  stocks,  and  $100  as  supervisor's 
fees.  The  last  item — that  is,  supervisor's  fees — is  exempt 
under  the  law  (Sec.  201,  subdivision  a).  The  $300  in 
dividends  is  not  taxable,  inasmuch  as  it  is  derived  from 
a  mere  investment  not  connected  with  his  trade  or  busi 
ness.  His  net  income  of  class  A  will  therefore  consist 
of  his  salaries  and  his  compensation  for  personal  services, 
a  total  of  $3,350.  Since  he  is  entitled  to  a  deduction  of 
^ti.000  as  to  this  class  of  income,  he  will  have  no  tax  to 
pay  at  the  8  percent  rate  under  Art.  15. 

Art.  37.  Deduction  of  contributions  for  religious, 
charitable,  etc.,  purposes. — Contributions  or  gifts  \'<>v 
religious,  charitable,  etc.,  purposes  allowed  as  a  deduction 
for  purposes  of  the  income  tax  under  paragraph  "  Ninth  " 
of  subdivision  (a)  of  See.  5  of  the  act  of  September  8, 
1916,  as  amended,  may,  subjeel  to  the  limitations  therein 
contained,  be  deducted  in  computing  the  net  income  of 


774  HOLMES    INCOME   TAX   SUPPLEMENT 

I  lie  trade  or  business  for  purposes  of  the  excess  profits 
lax  only  when  it  is  shown  to  the  satisfaction  of  the  Com- 
missioner of  Internal  lievenue  that  such  contributions  or 
gifts  are  made  by  the  trade  or  business  and  not  by  the 
individual  in  his  personal  capacity. 

Art.  38.  Determination  of  net  income  for  the  prewar 
period  where  there  is  invested  capital. — The  net  income 
which  is  derived  from  a  trade  or  business  having  invested 
capital  (constituting  net  income  of  class  B  as  defined  in 
article  14)  shall  be  determined  for  each  of  the  calendar 
years  1911,  1912,  and  1913  upon  the  same  basis  and  in 
the  same  manner  as  provided  in  Art.  36. 

Art.  39.  Deduction  allowed  for  salary  to  himself. — 
An  individual  carrying  on  a  trade  or  business  having  an 
invested  capital  may  in  computing  the  net  income  of  the 
trade  or  business  for  purposes  of  the  excess  profits  tax 
deduct  a  reasonable  amount  designated  by  him  as  salary 
or  compensation  for  personal  service  actually  rendered 
by  him  in  the  conduct  of  such  trade  or  business.  In  no 
case  shall  the  amount  so  designated  be  in  excess  of  the 
salaries  or  compensation  customarily  paid  for  similar 
service  under  like  responsibilities  by  corporations  or  part- 
nerships engaged  in  like  or  similar  trades  or  businesses. 

In  the  case  of  a  non-resident  alien  individual,  the 
amount  deducted  shall  be  limited  to  that  portion  of  the 
salary  or  compensation  which  is  for  service  rendered 
with  respect  to  trade  or  business  carried  on  in  the  United 
States. 

The  amount  so  designated  shall,  however,  be  included 
in  computing  his  net  income  of  class  A  under  Art.  35; 
and  the  balance  of  the  income  from  his  trade  or  busi- 
ness shall  be  included  in  computing  his  net  income  of 
class  B  under  Art.  36. 

Illustrations.     An  individual  owns  and  runs  a  news- 


WAR    EXCESS    PROFITS    TAX  775 

paper  having  as  invested  capital  of  $50,000.  The  ael 
income  from  the  aewspaper,  without  making  any  alloM 

anee  for  the  salary  of  the  owner,  is  $20,000,  and,  as  in- 
come of  class  B,  is  subject  to  the  graduated  rates  pre- 
scribed in  Art.  16.     His  deduction,  as  provided   Eor  in 

subdivision  (b)  of  Art.  21,  would  be  $4,500  (9  I"1'  ,'1,11' 
of  his  capital)  plus  $6,000,  a  total  of  $10,500.    If,  bow 
ever,  be  allows  himself  a  salary  of  $3,000,  the  net  income 
from  the  newspaper  will  be  $17,000,  and  the  deduction 
of  $10,500  will  be  applied  against  that  amount. 

His  salary  of  $3,000  must  be  included  in  his  return  as 
income  of  class  A,  which  is  subject  to  the  8  per  cent  rate 
under  Art.  15.  If  it  constitutes  his  only  income  of  that 
class  he  will  pay  no  tax  thereon,  inasmuch  as  it  is  less 
than  the  deduction  of  $6,000  to  which  he  is  entitled  as 
to  that  class  of  income.  But  if,  for  example,  he  receives 
in  addition  a  salary  of  $4,000  as  president  of  the  local 
bank,  his  total  net  income  of  class  A  will  be  $7,000,  and 
be  will  be  required  to  pay  a  tax  of  8  per  cent  on  $1,000 
thereof,  or  $80. 

Art.  40.  If  deduction  is  made  under  Art.  39  corres- 
ponding- deduction  must  also  be  made  for  prewar  pe- 
riod.— If,  in  computing  net  income  for  purposes  of  the 
excess  profits  tax,  an  individual  deducts  a  reasonable 
a  mount  designated  as  salary  or  compensation  for  per- 
sonal services  rendered  by  himself,  as  allowed  by  Art. 
39,  he  must  also  in  computing  net  income  for  the  prewar 
period,  make  a  corresponding  deduction. 

Art.  41.  Individual  member  of  partnership. — Inas- 
much as  a  partner  in  his  individual  capacity  is  not  con- 
sidered to  be  engaged  in  trade  or  business  with  respect 
to  his  share  in  the  profits  of  the  partnership,  he  is  not  sub- 
ject to  excess  profits  tax  thereon.  Consequently,  in  com- 
puting his  net  income  for  purposes  of  the  excess  profits 


776  HOLMES    I.M'OJli:    TAX    SUPPLEMENT 

tax  lie  need  not  include  his  share   of  the  partnership 
profits. 

He  shall,  however,  in  computing  his  net  income  of  class 
A  under  Art.  35,  include  any  salary  or  compensation 
from  the  partnership  for  personal  services  (including 
any  amount  allowed  to  the  partnership  as  a  deduction  on 
his  account  for  the  period  prior  to  March  1,  1918,  in 
accordance  with  Art.  32.) 

INVESTED   CAPITAL GENERAL  PROVISIONS 

Art.  42.  Allowance  for  depletion,  depreciation,  and 
obsolescence  in  computation  of  invested  capital. — The 

term  ' '  invested  capital ' '  as  used  in  the  excess  profits  tax 
law  means  the  invested  capital  of  the  present  owner. 
The  basis,  or  starting  point,  in  the  computation  of  in- 
vested capital  is  found  in  the  amount  of  cash  and  other 
property  paid  in,  the  original  values  of  such  other  prop- 
erty being  determined  in  accordance  with  the  rules  laid 
down  in  these  regulations.  But  the  computation  does 
not  stop  with  such  original  entries  or  amounts;  it  must 
take  properly  into  account  the  surplus  and  undivided 
profits.  In  the  computation  of  surplus  and  undivided 
profits,  however,  full  recognition  must  first  be  given  to 
expenses  incurred  and  losses  sustained  from  the  original 
organization  of  the  business  concern  down  to  the  taxable 
year,  including  among  such  expenses  and  losses  a  reason- 
able  allowance  for  depletion,  depreciation,  or  obsolescence 
of  property  originally  acquired  for  cash  or  for  stock  or 
shares  or  in  any  other  manner.25    If  value  appreciation 

25  The  question  of  depreciation  and  other  losses  presents  many 
difficulties.  It  is  clear  that  depreciation,  depletion  and  losses 
must  be  deducted  to  reduce  the  surplus  and  undivided  profits 
accounts  to  their  present  value,  since  the  law  allows  only  sur- 
plus and   undivided  profits  used  and   employed  in  the  business 


W  \l;    I  Mi  SS    PROFITS   TAX  777 

of  a  kind  no!  subject  to  income  tax  (other  than  thai  al- 
lowed under  Art.  55)  has  been  taken  up  in  the  accounts, 
a  deduct  ion  must  be  made  in  respect  of  such  appreciation 
so  taken  up.  In  the  computation  of  the  invested  capital 
for  any  year  full  effeel  must  also  be  given  to  any  liquida 
i  ion  of  the  original  capital. 

Art.  43. — How  to  ascertain  average  invested  capital 
for  the  year,  averaged  monthly. — The  invested  capital 
for  any  prewar  or  taxable  year  (or  where  the  tax  is  com- 
puted upon  the  liasis  of  a  period  loss  than  a  year,  for 
such  period)  is  the  average  invested  capital  for  the  year 
or  period  averaged  monthly,  according  to  the  following 
rules : 

(a)  Add  the  capital  for  each  of  the  several  months 
during  which  no  change  occurs,  and  the  average  capital 
(ascertained  as  provided  in  subdivision  (b)  of  this  ar- 
ticle) for  each  month  in  which  a  change  occurs  and  divide 
the  total  by  the  number  of  months  in  the  year  or  period.20 

(b) "To  ascertain  the  capital  for  any  month  in  which 
a  change  occurs  multiply  the  capital  as  of  the  first  day  of 

to  be  included  as  invested  capital.  But  the  law  contains  no  re- 
quirement that  cash  or  property  paid  in  by  the  stockholders  or 
members  shall  be  used  or  employed  in  tlio  business.  The  in- 
tent seems   to   be   to   require   a   deduction    based    on    the   capital 

originally  paid  in  whether  or  not  such  amount  lias  been  reduced 
by  losses.  A  corporation,  for  instance,  to  which  a  certain  amount 
of  capital  was  once  contributed,  and  which  lias  not  paid  back  any 
part  thereof  to  its  stockholders,  either  directly  or  indirectly, 
should  be  allowed  to  claim  deduction  on  the  entire  amount  orig- 
inally paid  in  regardless  of  losses  which  may  have  unpaired  such 
capital 

26  To  illustrate:  If  the  corporation  has  been  engaged  in  busi- 
ness for  six  months  with  an  invested  capital  of  $100,000  for 
each  of  such  months,  the  invested  capital  will  be  ascertained  by 
dividing  $600,000  by  6 — not  by  12.  But  the  deduction  ascer- 
tained on  that  basis  will  be  divided  by  2.     Sec  Art.  20. 


778  HOLMES    INCOME   TAX   SUPPLEMENT 

the  month  by  Hie  number  of  days  it  remains  constant 
and  the  capital  after  each  change  by  the  number  of  days 
(including  the  day  on  which  the  change  occurs)  during 
which  it  remains  constant,  add  the  products,  and  divide 
the  sum  by- the  number  of  days  in  the  month. 

Art.  44.  Items  not  allowed  to  be  included  in  invested 
capital. — The  second  paragraph  of  Sec.  207  of  the  ex- 
cess profits  law  specifies  certain  items  which  may  not  be 
included  in  invested  capital,  namely: 

(a)  Stocks,  bonds  (other  than  obligations  of  the  United 
States),  or  other  assets,  the  income  from  which  is  not  sub- 
ject to  the  excess  profits  tax ;  and 

(&)  Money  or  other  property  borrowed. 

The  term  "money  or  other  property  borrowed"  as 
used  in  Sec.  207  and  these  regulations  includes  not  only 
cash  or  other  borrowed  property  which  can  be  identified 
as  such,  but  current  liabilities  and  temporary  indebted- 
ness of  all  kinds,  and  any  permanent  indebtedness  upon 
which  the  tapayer  is  entitled  to  an  interest  deduction  in 
computing  net  income.  A  corporation  which  under  the 
income-tax  law  is  allowed  to  deduct  only  a  part  of  the 
entire  interest  paid  upon  its  indebtedness,  may  include 
in  its  invested  capital  such  a  proportion  of  its  permanent 
indebtedness  as  the  amount  of  interest  upon  such  in- 
debtedness which  the  corporation  is  not  allowed  to  deduct 
is  of  the  total  amount  of  interest  paid  upon  such  in- 
debtedness during  the  taxable  year. 

Art.  45.  When  income  from  tax-free  securities  con- 
sists partly  of  trading  profits  and  partly  of  interest, 
dividends,  etc. — Whenever  income  consists  partly  of 
gains  or  profits  subject  to  the  excess  profits  tax  arising 
from  trading  in  stocks,  bonds,  etc..  the  dividends  or 
interest  on  which  are  not  subject  to  such  tax,  and  partly 
of  such  dividends  or  interest,  then,  subject  to  the  limita- 


WAK   EXCESS   PROFITS   TAX  77!' 

lions  as  to  l»orrowed  money,  there  shall  be  included  in 
the  invested  capital  an  amonnl  which  bears  the  same 
ratio  to  the  total  amount  invested  in  such  stocks  or  bonds 
as  the  amount  of  such  gains  or  profits  bears  to  the  total 
amount  of  such  income. 

Art.  46.  Treatment  of  stock  of  foreign  corporations 
when  held  by  domestic  corporations  or  partnerships  or 
by  citizens  or  residents  of  the  United  States. — In  the 
case  of  domestic  corporations  or  partnerships  and  of  citi 
:i  ns  or  residents  of  the  United  States  holding  stock  in  a 
foreign  corporation  part  of  whose  net  income  is  subject 
to  the  income  tax,  there  shall  be  included  in  invested 
capital  such  proportion  of  the  value  of  the  stock  in  such 
foreign  corporation  as  the  net  income  of  such  foreign 
corporation  from  sources  outside  the  United  Slates  is  of 
its  entire  net  income.27 

Art.  47.  Construction  of  terms  'tangible  property" 
and  ''intangible  property." — The  term  "other  intan- 
gible property''  as  used  in  Sec.  207  will  be  construed  to 
mean  property  of  a  character  similar  to  good  will,  trade- 
marks, and  the  other  specific  kinds  of  property  enumer- 
ated in  the  same  clause.  With  resped  to  property  not' 
clearly  of  such  a  character,  rulings  will  be  issued  as  occa- 
sion may  demand  to  indicate  whether  it  shall  be  regarded 
as  tangible  or  intangible. 

The  following  classes  of  property  when  paid  in  for 
stock  or  shares  in  a  corporation  or  partnership,  will  be 
regarded  as  tangible  property  so  paid  in  : 

a)   Stocks. 
(b)  Bonds. 

87  That  is,  to  the  extent  that  the  dividends  .ire  included  in  in- 
come the  -lock  may  be  included  in  invested  capital.  See  Art. 
27. 


780  HOLMES    INCOME    TAX   SUPPLEMENT 

(c)  Bills  and  accounts  receivable. 

(d)  Notes  and  other  evidences  of  indebtedness. 

(e)  Leaseholds. 

But  when  a  corporation  pays  for  intangible  property 
by  the  issuance  of  its  own  stock  or  bonds,  this  will  not  be 
regarded  as  being  a  payment  bona  fide  made  in  cash  or 
tangible  property  within  the  meaning  of  Sec.  207. 

Art.  48.  Invested  capital  of  foreign  corporations  or 
partnerships  or  non-resident  alien  individuals. — When 
used  with  reference  to  a  foreign  corporation  or  partner- 
ship or  a  non-resident  alien  individual,  the  term  "in- 
vested capital"  means  that  proportion  of  the  entire  in- 
vested capital  as  defined  and  limited  by  these  regulations 
which  the  net  income  from  sources  within  the  United 
States  is  of  the  entire  net  income. 

Art.  49.  Reorganization  on  or  after  January  2,  1913. 
— A  trade  or  business  carried  on  by  a  corporation,  part- 
nership, or  individual,  which  has  been  formally  organized 
or  reorganized  on  or  after  January  2,  1913,  but  which 
is  substantially  a  continuation  of  a  trade  or  business 
carried  on  prior  to  that  date,  shall,  for  the  purposes  of 
the  excess  profits  tax,  be  deemed  to  have  been  in  existence 
prior  to  that  date  and  the  invested  capital  of  its  pre- 
decessor prior  to  that  date  shall  be  deemed  to  have  been 
its  invested  capital.  This  article  relates  to  the  prewar 
period  and  does  not  apply  to  the  invested  capital  for  the 
taxable  year.28 

Art.  50.  Reorganization  after  March  3, 1917. — In  case 
of  the  reorganization,  consolidation,  or  change  of  owner- 
ship of  a  trade  or  business  after  March  3,  1917,  if  an 
interest  or  control  in  such  trade  or  business  of  50  per 
cent  or  more  remains  in  control  of  the  same  persons,  cor- 

28  See  Art.  22. 


WAlt   EXCESS  PROFITS  TAX  781 

porations,  associations,  partnerships,  or  any  of  them,  then 
in  ascertaining  the  invested  capital  of  the  trade  or  busi- 
ness :io  asset  transferred  or  received  from  the  prior  trade 
or  business  shall  be  allowed  a  greater  value  than  would 
have  been  allowed  under  these  regulations  in  computing 
the  invested  capital  of  such  prior  trade  or  business  if 
such  asset  had  not  been  so  transferred  or  received,  unless 
such  asset  was  paid  for  specifically  as  such,  in  cash  or 
tangible  property,  and  then  not  to  exceed  the  actual 
cash  or  actual  cash   value  of  the  tangible  property   paid 

therefor  at  the  time  of  such  payment. 

Art.  51.  Invested  capital  for  prewar  period.— The  in- 
vested capita]  for  the  prewar  period  shall,  in  general,  be 
determined  in  the  same  manner  as  for  the  taxable  year, 
except  that  the  valuation  as  of  .January  1,  1914,  shall  Q01 
apply  to  tangible  property  paid  in  for  stock  or  shares.29 

Art.  52.  Scope  of  Sec.  210. — Sec.  210  provides  for  ex- 
cept ional  cases  in  which  the  invested  capital  can  not  be 
satisfactorily  determined.  In  such  cases  the  taxpayer 
may  submit  to  the  Commissioner  of  Internal  Revenue  evi- 
dence in  support  of  a  claim  for  assessment  under  the 
provisions  of  Sec.  210.30  Such  except  ional  eases  may  con- 
sist, among  others,  of  the  following: 

(1)  Where,  through  defective  accounting  or  the  lack 
of  adequate  data,  it  is  impossible  accurately  to  compute 
invested  capital. 

(2)  Where  upon  application  by  a  foreign  taxpayer  the 
Secretary  of  the  Treasury  finds  thai  the  expense  of  secur- 
ing the  data  necessary  for  the  computation  of  the  in- 
vested capital  would  be  unreasonable  in  view  of  the 
amount    of  tax   involved.   <»r  that   it   is  impracticable  to 

29  See  Art.  55. 

30  See  Arts.  Is;  and  24. 


782  HOLMES   INCOME    TAX   SUPPLEMENT 

determine  either  the  "entire  invested  capital"  or  the 
"entire  net  income." 

(3)  Long-established  business  concerns  which  by 
reason  of  ultra-conservative  accounting  or  the  form  and 
manner  of  their  organization  would,  through  the  opera- 
tion of  Sec.  207,  be  placed  at  a  serious  disadvantage  in 
competing  with  representative  concerns  in  a  like  or 
similar  trade  or  business. 

(4)  Where  the  invested  capital  is  seriously  dispropor- 
tionate to  the  taxable  income.  Such  cases  may  arise 
through : 

(a)  The  realization  in  one  year  of  the  earnings  of 
capital  unproductively  invested  through  a  period  of  years 
or  of  the  fruits  of  activities  antedating  the  taxable 
year;  or, 

(&)  Inability,  to  recognize  or  properly  allow  for  amor- 
tization, obsolescence,  or  exceptional  depreciation  due  to 
the  present  war,  or  to  the  necessity  in  connection  with  the 
present  war  of  providing  plant  which  will  not  be  wanted 
for  the  purposes  of  the  trade  or  business  after  the  termi- 
nation of  the  .war. 

INVESTED   CAPITAL CORPORATIONS  AND  PARTNERSHIPS 

Art   53.  Rule   for   computing   invested   capital. — In 

computing  invested  capital,  every  corporation  or  partner- 
ship paying  taxes  at  the  graduated  rates  prescribed  in 
Sec.  201, J1  shall  add  together  its  paid-in  capital  and  its 
paid-in  or  earned  surplus  and  undivided  profits  (under 
whatever  name  the  same  may  be  called)  as  shown  by  its 
books  at  the  beginning  of  the  taxable  year.  The  total 
thus  obtained  shall  be  adjusted  for  any  asset  or  item 
which  it  covers  that  is  not  carried  on  the  books  at  the 

31  Seo  Art.  16. 


WAR   EXCESS   PROFITS   TAX  783 

valuation    prescribed    by   law   or   by   those   regulations. 
When  necessary,  adjustment    (addition  or  subtraction 
shall  be  made  in  respect  of  the  following: 

ADJUSTMENTS 

1.  Stock  or  shares  issued  in  Ihc  purchase  of  intangible 
property  prior  to  March  3,  1917,  which  cannot  be  in- 
cluded in  an  amount  exceeding  (a)  20  per  cent  of  the 
par  value  of  the  total  stock  or  shares  outstanding  on  thai 
date,  (b)  the  actual  value  of  such  intangible  property  at 
the  dale  acquired,  or  (c)  the  par  value  of  the  stock  or 
shares  issued  in  payment  therefor,  whichever  is  the 
lowest.32 

2.  Stock  or  shares  issued  for  a  mixed  aggregate  of 
tangible  property,  patents  and  copyrights,  and  good  will 
or  other  intangible  property.33 

3.  Stock  or  shares  issued  for  patents  and  copyrights, 
valued  at  (a)  their  actual  cash  value  at  the  time  of  p.i.\ 
ment,  or  (b)  the  par  value  of  the  stock  or  shares  issued 
therefor,  whichever  is  lower.34 

4.  Stock  or  shares  issued  for  tangible  property  prior  to 
January  1,  1914,  valued  at  (a)  the  actual  cash  value  of 
such  property  on  January  1,  1914,  or  (b)  the  par  value 
of  the  stock,  whichever  is  lower.35 

5.  Stock   originally   issued   for   property    and   subse 
quently  returned  to  the  corporation  as  a  gift,  eh-.36 

6.  Add  any  proportion  of  its  permanent  indebtedness 
which  may  be  included  under  Art.  44. 

7.  Add  value  of  tangible  property  paid  in  for  stock  or 

32  Sec  Arts.  57  and  58. 

33  See  Art.  59. 

34  See  Art.  56. 

35  See  Art.  55. 

36  See  Art.  54. 


784  HOLMES   INCOME   TAX   SUPPLEMENT 

shares  in  excess  of  the  par  value  of  such  shares,  when 
authorized  by  Art.  63. 

8.  Add  amounts  expended  in  the  past  for  (a)  the  ac- 
quisition of  tangible  property  or  (6)  specifically  for  good 
will  and  other  similar  intangible  property,  when  author- 
ized by  Art.  64. 

9.  For  the  valuation  of  assets  acquired  in  reorganiza- 
tions, etc.,  (a)  effected  after  March  3,  1917,  see  Art.  50; 
(b)  as  to  the  prewar  period,  see  Articles  49  and  51. 

10.  Deduct  amounts  representing  appreciation  ex- 
cluded by  Art.  42. 

11.  Make  any  additional  deductions  required  by  reason 
of  insufficient  allowances  in  the  accounts  of  the  taxpayer 
for  depletion,  depreciation,  and  obsolescence.37 

Whenever  any  corrections  are  made  in  respect  of  the 
capital  stock  and  surplus,  corresponding  corrections  must 
be  made  in  the  respective  asset  items  in  the  balance  sheet 
of  the  taxpayer. 

After  making  any  adjustments  required  under  Para- 
graphs 1  to  11  above,  the  adjusted  total  of  the  capital 
and  surplus  account  will  represent  the  invested  capital  at 
the  beginning  of  the  taxable  year,  except  that  in  any 
case  where  the  admissible  assets  (and  these  include  all 
assets  when  valued  in  accordance  with  these  regulations, 
except  stocks,  bonds — other  than  obligations  of  the  United 
States — the  income  of  which  is  not  subject  to  excess- 
profit  tax)  are  less  than  the  amount  of  such  adjusted 
total,  then  the  invested  capital  must  be  further  reduced 
to  an  amount  equal  to  the  sum  of  the  admissible  assets. 
Tax-free  securities  and  stock  in  foreign  corporations  may 
be  included  as  admissible  assets  to  the  extent  authorized 
in  Articles  45  and  46. 

37  See  Art.  42. 


W  \i;    i  XCESS   PROPITS   TAX  785 

[f  there  has  been  any  change  made  during  the  taxable 
year  in  the  amounl  of  the  invested  capital,  the  monthly 
average  shall  be  taken,88  bu1  in  no  case  may  i  lie  invested 
capital  include  an$  surplus  or  undivided  profits  earned 
during  l  he  taxable  year.89 

Willi  respecl  to  the  taxable  year  1!M7.  i-scvy  such  cor 
jiiir.it i« mi  and  partnership  will  lie  required  to  submit  a 
balance  sheel  as  at  the  firsl  day  of  tin-  taxable  year  and 
also  a  balance  sheet  as  at  the  close  of- the  taxable  year. 
Thereafter  everj  such  corporation  and  partnership  will 
he  required  to  submit  a  balance  sheet  as  at  the  close  of 
each  taxable  year.  Balance  sheets  should  be  made  in 
accordance  with  the  books  of  the  taxpayer  and  changes 
in  respect  of  any  items  therein  made  pursuant  to  these 
regulations  should  be  explained  in  a  separate  statement 
attached  to  the  balance  sheet  to  which  it  relates. 

Art.  54.  Stock  returned  to  corporation. — For  the  pur- 
pose of  computing  invested  capital,  in  eases  where  the 
stock  of  a  corporal  ion  is  issued  or  exchanged  for  property 
(tangible  or  intangible),  the  following  rule  will  apply: 

When  any  of  such  stock  is  returned  to  the  corporation 
as  a  gifl  or  for  a  consideration  substantially  less  than 
its  par  value,  the  stock  so  returned  shall  not  be  treated 
as  ;i  part  of  the  stock  issued  or  exchanged  lor  such  prop- 
erty. The  proceeds  derived  in  cash  or  its  equivalenl  from 
the  resale  of  the  stock  so  returned  shall,  however,  be 
included  in  the  invested  capita]  if  retained  and  employed 
in  the  business. 

Art  55.  Valuation  of  tangible  property  paid  in  for 
stock  or  shares.  Tangible  property  paid  in  for  stock 
or  shares  prior  to  January   1.  1!'14.  must   be  valued  a1 

38  See  Art.  43. 

39  See  Art.  61. 


786  HOLMES   INCOME   TAX   SUPPLEMENT 

either  (a)  the  actual  cash  value  of  such  property  on  Jan- 
uary 1,  1914,  or  (b)  the  par  value  of  the  stock  or  shares 
specifically  issued  therefor,  whichever  is  lower.  This  is 
one  of  the  few  cases  in  which  the  law  permits  allowance 
to  he  made  for  appreciation,  and  here  no  appreciation  can 
he  recognized  unless  the  original  stock  or  shares  were 
specifically  issued  in  exchange  for  such  tangible  property. 

Tangible  property  paid  in  for  stock  or  shares  on  or 
after  January  1,  1914,  will  be  taken  at  the  actual  cash 
value  of  such  property  at  the  time  of  payment,  irrespec- 
tive of  the  par  value  of  the  stock  or  shares. 

Art.  56.  Patents  and  copyrights. — Patents  and  copy- 
rights paid  in  for  stock  or  shares  must  be  valued  at 
either  (a)  the  actual  cash  value  at  the  time  of  payment 
or  (b)  the  par  value  of  the  stock  or  shares  issued  there- 
for, whichever  is  lower. 

Art.  57.  Valuation  of  intangible  property. — If  good 
will,  trademarks,  trade  brands,  franchises  of  a  corpora- 
tion or  partnership,  or  other  intangible  property  has  been 
purchased  with  stock  or  shares  issued  prior  to  March  3, 
1917,  the  amount  that  may  be  included  in  invested  capi- 
tal must  not  exceed  (a)  20  per  cent  of  the  par  value  of 
the  total  stock  or  shares  outstanding  on  that  date,  nor 
(/>)  the  actual  value  of  the  asset  at  the  date  acquired, 
nor  (<■)  the  par  value  of  the  stock  issued  in  payment 
for  the  asset. 

Art.  58.  Application  of  20  per  cent  limitation  upon 
intangible  property.— The  20  per  cent  limitation  upon 
intangible  property  purchased  prior  to  March  3,  1917, 
for  or  with  stock  or  shares  of  the  corporation  or  partner- 
ship, applies  not  to  each  item  or  class  of  intangible  prop- 
erty separately,  but  to  the  aggregate  amount  of  all  such 
property  so  purchased.  Such  intangible  property  may 
be  included  in  the  invested  capital  only  up  to  an  amount 


WAR   EXCESS   PROFITS   TAX  787 

nut  exceeding  120  per  cent  of  the  total  stock  or  shares 
of  the  corporation  or  partnership  on  March  .'5,  1917,  even 
though  the  aggregate  amount  of  such  intangible  property 
he  greater  in  value  than  such  20  per  cent  of  the  par  value 
of  the  total  stock  or  shares. 

Intangible  property  bona  fide  purchased  prior  to 
March  3,  1917,  with  stock  having  no  par  value  may  be 
included  iu  invested  capital  at  a  value  not  exceeding  the 
actual  cash  value  of  such  intangible  property  at  the  time 
of  the  purchase  and  in  an  amount  not  exceeding  20  per 
cent  of  the  total  shares  of  stock  outstanding  on  March 
3,  1!»17,  measured  by  their  value  as  at  the  date  or  dates 
of  issue. 

Art.  59.  Rules  to  govern  cases  where  shares  or  secu- 
rities are  issued  for  mixed  aggregate  of  tangible  and  in- 
tangible property. — Where  stock  or  shares  (or  stock 
or  shares  and  bonds  or  other  obligations)  have,  prior  to 
March  3,  1917,  been  issued  for  a  mixed  aggregate  of — 

(a)   Tangible  property, 

(/>)   Patents  and  copyrights,  and 

(c)   Good  will  or  other  intangible  property, 
the  following  rules  will  govern  : 

(1)  In  the  absence  of  satisfactory  evidence  to  the  con- 
trary, it  will  be  presumed  in  the  case  of  a  corporation, 
that  its  stock  was  issued  for  the  following  purposes  in 
the  order  named : 

(a)   Good  will  or  other  intangible  property, 
(/>)    Patents  and  copyrights,  and 
(c)   Tangible  property. 

(2)  Upon  the  production  by  the  taxpayer  of  evidence 

satisfactory  to  the  Commissioner  of  Internal  Revenue  as 

to  the  actual  values  at  the  date  of  acquisition  of  (a)  the 

tangible  property  and  (b)   the  patents  and  copyrights, 

the  sum  of  these  two  items  may  be  applied  against  the 
F.  T.  Tax  Supp.— 9 


788  HOLMES   INCOME   TAX   SUPPLEMENT 

total  par  value  of  the  securities  issued  and  the  remainder 
will  then  be  deemed  to  represent  the  par  value  of  the 
securities  issued  for  the  good  will  or  other  intangible 
property. 

(3)  Cases  where  mixed  aggregates  of  tangible  and  in- 
tangible property  have  been  paid  in  for  stock  and  bonds 
shall,  if  the  Secretary  of  the  Treasury  is  unable  to  de- 
termine satisfactorily  the  respective  values  of  the  several 
classes  of  property  at  the  time  of  payment  be  treated  as 
coining  under  Articles  18  and  24  and  the  tax  shall  be, 
assessed  accordingly. 

Art.  60.  Valuation  of  intangible  assets  purchased. 
— Good  will  and  other  similar  intangible  assets  purchased 
with  cash  or  tangible  property  must  be  taken  at  a  value 
not  in  excess  of  the  cash  or  actual  cash  value  of  the 
tangible  property  specifically  paid  therefor. 

Art.  61.  Surplus  or  undivided  profits  earned  during 
any  year  excluded  in  computing  invested  capital  for 
such  year. — Profits  earned  during  any  taxable  year  or 
prewar  year  shall  not  be  included  in  the  computation  of 
the  invested  capital  for  such  year,  even  though  set  up  as 
'•surplus"  upon  the  books  or  distributed  in  the  form  of 
stock  dividends.40 

40  Sec.  207,  Subdiv.  (a)  provides  that  there  may  be  included 
as  invested  capital  "paid  in  or  earned  surplus  and  undivided 
profits  used  or  employed  in  the  business,  exclusive  of  undivided 
profits  earned  during  the  taxable  year."  A  liberal  construction 
of  this  language  would  permit  the  inclusion  of  such  amounts  of 
the  earnings  of  the  taxable  year  as  are  in  fact  actually  and  per- 
manently employed  as  additional  capital  in  the  business.  The 
omission  of  the  word  surplus  in  the  second  Clause  of  the  lan- 
guage quoted  is  not  without  significance;  the  use  of  the  phrase 
"undivided  profits,"  when  the  word  "profits"  would  clearly 
have  excluded  all  earnings  of  the  year,  also  supports  a  liberal 
construction.      It    is   manifestly    just   to    allow    credit    for    addi- 


WAR   EXCESS   PROFITS    TAX  789 

Art.  62.  Scope  of  phrase  "surplus  and  undivided 
profits."— Clause  (3)  of  subdivision  (a)  of  Sec.  207  au- 
thorizes the  inclusion  in  invested  capital  of  earned  sur- 
plus and  undivided  profits  used  or  employed  in  the 
business,  [nasmuch  as  Sec.  201  provides  thai  al]  the 
income  of  a  corporation  or  partnership  shall  be  deemed 
to  be  received  from  its  trade  or  business,  all  the  surplus 
and  undivided  profits  of  a  corporation  or  partnership 
(exclusive  of  undivided  profits  earned  during  the  year), 
from  whatever  source  derived,  will,  unless  invested  in 
stocks,  bonds  (other  than  obligations  of  the  United 
States),  or  other  assets,  the  income  from  which  is  not 
subject  to  the  excess  profits  tax,  be  deemed  to  be  used  or 
employed  in  the  business  and  may  be  included  in  the  in- 
vested capital. 

Art.  63.  When  tangible  property  may  be  included  in 
surplus. — "Where  it  can  be  shown  by  evidence  satisfac- 
tory to  the  Commissioner  of  Internal  Revenue  that 
tangible  property  has  been  conveyed  to  a  corporation  or 
partnership  by  gift  or  at  a  value,  accurately  ascertain- 
able or  definitely  known  as  at  the  date  of  conveyance, 
clearly  and  substantially  in  excess  of  the  cash  or  the  par 
value  of  the  stock  or  shares  paid  therefor,  then  the 
amount  of  the  excess  shall  be  deemed  to  be  paid  in  sur- 

tion;il  capital  employed  during  the  year  when  the  earnings  there- 
from are  added  to  the  taxable  income.  The  difficulty  of  dis- 
tinguishing between  current  earnings  actually  re-invested  in  the 
business  during  the  year  and  earnings  merely  accumulated  for 
distribution  at  the  end  of  the  year  may  have  militated  against 
a  broader  construction  of  this  provision.  But  in  any  event  the 
declaration  of  a  stock  dividend  would  be  a  clear  indication,  for 
by  such  act  the  profits  become  capital  and  are  taken  out  of  the 
class  of  surplus  and  undivided  profits.  Art.  69  permits  the  in- 
clusion of  profits  earned  during  the  taxable  year  in  computing 
the  invested  capital  of  individuals. 


790  HOLMES   INCOME    TAX   SUPPLEMENT 

plus.  The  adopted  value  shall  not  cover  mineral  deposits 
or  other  properties  discovered  or  developed  after  the  date 
of  conveyance,  but  shall  be  confined  to  the  value  accur- 
ately ascertainable  or  definitely  known  at  that  time.41 

Evidence  tending  to  support  a  claim  for  a  paid-in 
surplus  under  these  circumstances  must  be  as  of  the 
date  of  conveyance,  and  may  consist,  among  other  things, 
of  (1)  an  appraisal  of  the  property  by  disinterested 
authorities,  (2)  the  assessed  value  in  the  case  of  real 
estate,  and  (3)  the  market  price  in  excess  of  the  par  value 
of  the  stock  or  shares.42 

Art.  64.  Reconstruction  of  surplus  and  undivided 
profits  accounts. — Where  through  failure  to  provide 
for  depletion,  depreciation,  obsolescence,  or  other  ex- 
penses or  losses,  or  where  for  any  other  cause  or  reason 
the  books  of  account  of  the  taxpayer  do  not  show  the 
true  paid-in  or  earned  surplus  and  undivided  profits,  in 
the  computation  of  invested  capital  such  adjustments 
shall  be  made  as  are  necessary  to  arrive  at  a  statement 
of  the  correct  amount. 

Where  a  taxpayer  claims  additions  to  the  capital  ac- 
count, the  books  of  account  will  be  presumed  to  show  the 
true  facts  and  the  burden  of  proof  will  rest  upon  the  tax- 
payer. Such  additions  will  be  accepted  only  to  the 
extent  and  under  the  conditions  stated  below  : 

(1)  Amounts  which  have  been  expended  in  the  past 
for  the  acquisition  of  plant,  equipment,  tools,  patterns, 

41  This  ruling  is  supported  by  the  language  of  the  statute 
(Sec.  207a)  which  permits  the  inclusion  of  "the  actual  cash 
value  of  tangible  property  paid  in  *  *  *  at  the  time  of  such 
payment. ' ' 

42  The  three  methods  outlined  are  not  exclusive.  Other  evi- 
dence may  be  submitted  to  show  the  value  at  the  time  of  acquisi- 
tion. 


WAB    EXCESS   PROFITS    TAX  791 

furniture,  fixtures,  or  like  tangible  property,  having  a 
useful  life  extending  substantially  beyond  the  year  in 
which  the  expenditure  was  made,  and  which  have  been 
charged  as  currrenl  expense,  may  (less  proper  reduction 
for  depreciation  or  obsolescence)  be  added  to  the  surplus 
account  in  computing  invested  capital  when  such  assets 
are  still  owned  and  in  active  use  by  the  taxpayer  during 
the  taxable  year.  Special  tools,  patterns,  and  similar 
assets  shall  not  be  assigned  any  value  if  their  cost  has 
been  recovered  through  having  been  included  in  the  price 
of  goods.  I  f  their  cost  has  not  been  so  recovered  and  they 
are  held  for  only  occasional  use,  they  shall  not  be  as- 
signed a  value  in  excess  of  the  fair  value  based  upon 
the  earnings  actually  arising  from  their  current  use. 
Assets  of  this  kind  not  in  current  use  shall  not  be  valued 
at  more  than  their  nominal  or  scrap  value. 

(2)  Amounts  expended  in  the  past  for  good  will,  trade- 
marks, trade-brands,  franchises,  and  other  intangible 
assets  of  a  like  character,  are  controlled  by  the  language 
of  the  statute  which  provides  that  such  assets  "shall 
be  included  in  invested  capital  if  the  corporation  or  part- 
nership made  payment  bona  tide  therefor  specifically  as 
such  in  cash,  or  tangible  property."  The  Commissioner 
of  Internal  Revenue  will  recognize  additions  to  invested 
capital  on  account  of  intangible  assets  only  if  such  assets 
have  been  explicitly  paid  for  in  the  manner  prescribed 
by  the  statute.  Where  expenditures  have  been  made  for 
the  general  development  of  intangible  assets,  and  charged 
as  current  expense,  no  readjustment  thereof  will  be  al- 
lowed.43 

43  Amounts  expended  prior  to  March  1,  191.°>,  in,  for  instance, 
litigation  to  protect  patents  are  proper  additions  to  the  cost  of 
the  patents,  bul  whether  or  not  advertising  expense  is  a  proper 
addition  to  the  investment  in  good  will,  trade  marks,  etc.,  de- 
pends upon  the  circumstances  in  each  particular  case. 


792  HOLMES   INCOME   TAX   SUPPLEMENT 

(3)  Amounts  under  (1)  and  (2)  above,  expended  on 
or  after  March  1,  1913,  will,  in  the  case  of  a  corporation, 
be  limited  strictly  to  items  which  have  not  been  deducted 
in  computing  taxable  income  upon  its  income  tax  return. 
Whenever  a  corporation  has  claimed  and  the  department 
has  allowed  a  deduction  in  respect  to  its  income  tax,  the 
item  upon  which  the  deduction  is  based  shall  not  be  re- 
stored to  the  surplus  account  nor  included  in  the  in- 
vested capital. 

(4)  The  taxpayer  shall  in  his  return  to  the  Commis- 
sioner of  Internal  Revenue  make  a  statement  of  the  pro- 
posed additions,  specifying  the  kinds  and  amounts  of 
property  involved,  the  years  in  which  the  expenditures 
were  made,  and  the  method  followed  in  distinguishing 
between  capital  outlays  and  current  expenses. 

(5)  The  taxpayer  shall  also  show  that  adequate  pro- 
vision has  been  made  for  the  depletion,  depreciation,  or 
obsolescence  of  such  of  the  assets  so  acquired  as  are, 
under  the  rulings  of  the  department,  subject  to  recog- 
nized depreciation. 

Art.  65.  Invested  capital  of  insurance  companies. — 
(a)  The  invested  capital  of  a  ^mutual  insurance  company 
will  be  deemed  to  consist  of  the  sum  of  (1)  any  surplus 
or  contingent  reserves  maintained  for  the  general  use 
of  the  business,  plus  (2)  any  legal  reserves  the  net 
additions  to  which  are  included  in  the  net  income  subject 
to  the  tax — subject  to  the  restrictive  provisions  of  Art. 
44  requiring  the  exclusion  of  tax-free  assets  other  than 
obligations  of  the  United  States, 

(b)  The  invested  capital  of  a  stock  insurance  company 
will  be  deemed  to  consist  of  its  capital  stock,  paid  in  or 
earned  surplus  and  undivided  profits  (subject  to  the  same 
restrictive  provision  of  Art.  44),  computed  in  accordance 
with  the  provisions  of  Art.  53. 


WAR   EXCESS   PROFITS    TAX  793 

IX  VESTED  CAPITAL — INDIVIDUALS 

Art.  66.  Items  included  in  invested  capital. — Subject 
to  the  limitations  stated  in  these  regulations,44  the  in- 
vested capital  of  an  individual  is  measured  by  the  total 
of  three  items : 

(1)  Actual  cash  paid  into  the  trade  or  business. 

(2)  Tangible  property  paid  into  the  trade  or  business. 

(3)  Patents  and  copyrights,  and  good  will,  trade- 
marks, trade-brands,  franchises,  and  other  intangible 
property.44* 

Art.  67.  Valuation  of  tangible  property. — Subject  to 
the  requirements  of  Art.  42  as  to  allowance  for  depletion, 
depreciation  and  obsolescence,  valuation  of  tangible  prop- 
erty will  be  as  follows : 

In  the  case  of  tangible  property  purchased  with 
cash  the  valuation  will  be  based  upon  the  cost  (esti- 
mated if  not  known)  in  cash  at  the  time  purchased. 

In  the  case  of  tangible  property  paid  in  as. such 
prior  to  January  1,  1914,  the  valuation  will  be  based 
upon  its  actual  cash  value  as  of  that  date.  Adequate 
evidence  of  such  value  must  be  furnished  by  the 
taxpayer.45 

In  the  case  of  tangible  property  paid  in  on  or  after 
Jan  nary  1,  1914,  the  valuation  will  be  based  upon  its 
actual  cash  value  at  the  time  of  payment. 

It  will  be  presumed  that  the  tangible  assets  employed 
in  the  trade  or  business  have  been  acquired  with  cash 
which  has  been  either  paid  in  directly  or  derived  from 
earnings  of  the  trade  or  business;  but  the  taxpayer  will 

44  See  Arts.  42  to  52  inclusive. 
44a  See  Art.  68. 

45  See   Art.   63. 


794  HOLMES   INCOME    TAX   SUPPLEMENT 

be  entitled  to  show  that  such  assets  were  paid  in  as 
tangible  property. 

Art.  68.  Valuation  of  intangible  property. — Patents 
and  copyrights,  and  good  will,  trade-marks,  trade-brands, 
franchise,  and  other  similar  intangible  assets  may  be  in- 
cluded in  invested  capital  at  a  value  not  to  exceed  the 
actual  cash  paid  therefor  or  the  actual  cash  value  at  the 
time  of  payment  of  the  tangible  property  paid  therefor, 
but  only  if  bona  fide  payment  was  made  therefor  spe- 
cifically as  such  in  cash  or  tangible  property.46 

Art.  69.  Profits  earned  during  taxable  year  may  be 
included. — The  restriction  in  respect  of  undivided 
profits  earned  during  the  taxable  year  which  is  imposed 
upon  corporations  and  partnerships  does  not  apply  to  in- 
dividuals, and  therefore,  unless  otherwise  shown,  the 
profits  of  the  taxable  year  remaining  in  the  trade  or  busi- 
ness will  be  deemed  to  have  arisen  ratably  throughout 
the  year,  and  the  capital  at  the  beginning  of  the  year 
may  be  increased  by  the  total  amount  of  such  profits 
remaining  in  the  trade  or  business  averaged  monthly 
over  the  year.47 

Art.  70.  Rule  for  computing  invested  capital. — 
Where  an  individual  keeps  books  of  account  his  invested 

46  Amounts  spent  in  litigation  to  protect  patents,  copyrights 
or  trade  marks  and  amounts  spent  in  advertising  to  establish 
trade  names,  etc.,  it  seems,  can  be  held  to  be  additional  invest- 
ments of  capital  if  not  charged  to  expense  and  proof  can  be 
produced  to  show  the  disbursements  to  have  been  made  specifically 
for  such  purposes.  "Other  similar  intangible  assets"  would 
include  licenses,  rights  to  manufacture  under  letters  patent,  etc. 

47  The  individual  may,  if  he  keeps  books,  show  that  the  greater 
part  of  the  year's  earnings  accrued  in  the  earlier  months  of  the 
year,  in  which  case  the  deduction  will  be  greater  than  if  the 
earnings  are  considered  to  have  arisen  ratably.  See  Art.  43  for 
manner  of  determining  monthly  average. 


WAR    EXCESS   PROFITS   TAX  795 

capital  will  be  found  in  bis  capital  accounl  (under  what- 
ever aame  it  may  he  called)  after  making  therein  any 
adjustments  or  corrections  required  by  these  regula- 
tions,48 provided  that  the  assets  other  than  those  not 
allowed  to  be  included  equal  or  exceed  the  amount  of  such 
capital  account.49  Otherwise  the  invested  capital  shall 
be  the  amount  of  such  assets. 

Where  an  individual  does  not  keep  books  of  account  he 
should  prepare  and  preserve  a  statement  as  at  the  begin- 
ning of  the  taxable  year  and  as  at  the  end  of  the  tax- 
able year,  showing  in  full  all  his  assets  valued  in  accord- 
ance with  these  regulations,  and  all  his  liabilities.  The 
exeess  of  such  assets  over  such  liabilities  at  the  beginning 
of  the  year  and  again  at  the  end  of  the  year  will  con- 
stitute the  invested  capital  of  the  individual  on  those 
dates,  respectively,  provided,  that  in  each  case  the  assets 
other  than  those  not  allowed  to  be  included  equal  or  ex- 
ceed the  amount  of  such  excess.  Otherwise  the  invested 
capital  shall  be  the  amount  of  such  assets.  The  amount 
of  the  difference  between  the  capital  thus  shown  as  at 
the  beginning  of  the  year  and  at  the  end  of  the  year 
will,  in  the  absence  of  evidence  to  the  contrary,  be  deemed 
to  have  arisen  ratably  throughout  the  year,  and  the  capi- 
tal at  the  beginning  of  the  year  will  be  increased  or 
decreased,  as  the  case  may  be,  by  such  amount  averaged 
monthly  over  the  year. 

48  The  adjustments  and  corrections  referred  to  are  evidently 
the  ones  described  in  Arts.  42  to  52  inc.  See  also  Art.  53,  para- 
graphs 8,  10  and  11. 

49  That  is,  if  the  assets  other  than  those  described  in  Art.  44 
equal  the  capital  account,  all  of  such  account  may  be  considered 
as  invested  capital.  In  other  words,  the  assets  which  are  ex- 
cluded by  Art.  44  are  used  first  to  offset  borrowed  money,  and 
only  the  amount  in  excess  of  borrowed  money  is  applied  to  reduce 
the  capital  account. 


796  HOLMES   INCOME   TAX   SUPPLEMENT 

If  an  individual  is  engaged  in  more  than  one  trade 
or  business  having  invested  capital,  then  his  invested 
capital  for  the  purposes  of  computing  the  deduction  and 
applying  the  rates  of  taxation  will  be  determined  by 
taking  the  total  invested  capital  of  all  such  trades  or 
businesses. 

The  terms  "assets''  and  "liabilities"  as  used  in  this 
article  relate  only  to  the  assets  or  liabilities  of  the  trade 
or  business. 

NOMINAL    CAPITAL 

Art.  71.  Application  of  Section  209.— Sec.  209  (see 
Art.  15)  applies  primarily  to  occupations,  professions, 
trades,  and  businesses  engaged  principally  in  rendering 
personal  service  in  which  the  employment  of  capital  is 
not  necessary  and  the  earnings  of  which  are  to  be  ascribed 
primarily  to  the  activities  of  the  owners. 

In  determining  whether  a  trade  or  business  is  taxable 
under  Art.  15  no  weight  will  be  given  to  the  fact  that  it 
is  carried  on  by  means  of  personal  service  unless  the  prin- 
cipal owners  are  regularly  engaged  in  the  active  conduct 
of  the  tirade  or  business. 

Art.  72.  Application  of  Section  209  not  to  be  affected 
by  mere  size  of  capital,  form  of  organization,  etc. — 
Business  concerns  which  render  professional  or  personal 
service  and  are  of  the  class  norinally  taxable  under  Art. 
15  shall  not  be  taken  out  of  that  class  merely  because  of 
the  size  of  the  capital  if  the  employment  of  such  capital 
is  necessitated  by  delay  and  irregularity  in  the  receipt 
of  fees,  etc.,  or  if  such  capital  is  wholly  or  mainly  used 
as  a  fund  from  which  to  advance  salaries,  wages,  etc.,  or 
to  provide  office  furniture,  accommodations^  and  equip- 
ment, nor  because  of  the  form  of  organization,  whether 
corporation  or  partnership,  nor  in  the  case  of  a  partner- 
ship because  of  the  number  of  partners. 


WAB   EXCESS   PROFITS   TAX  <9< 

Art.  73.  Agents  and  brokers. — Agents  and  brokers 
requiring  and  using  no  capital  or  merely  a  nominal 
capital  in  their  business  are  taxable  under  Art.  15,  but 
commission  houses  regularly  employing  a  substantial 
amount  of  capital,  whether  to  lend  to  principals  or  to 
carry  goods  on  their  own  account,  are  not  deemed  to 
be  agents  or  brokers  and  are  taxable  under  the  provisions 
of  Art.  16. 

Art.  74.  Meaning  of  "nominal  capital;"  businesses 
which  will  not  be  deemed  to  have  nominal  capital.— 
The  term  "nominal  capital"  as  used  in  Sec.  209  means  in 
general  a  small  or  negligible  capital  whose  use  in  a  par- 
ticular trade  or  business  is  incidental.  The  following  will 
not  be  construed  as  businesses  having  a  nominal  capital 
for  purposes  of  excess  profits  tax : 

(a)  A  business  which  because  of  conditions  arising 
from  the  war  or  exceptional  opportunities  for  profits 
earns  a  disproportionately  high  rate  of  profit  during  the 
taxable  year,  if  it  belongs  to  a  class  which  necessarily  and 
customarily  requires  capital  for  its  operation.  In  the 
determination  of  doubtful  cases  stress  will  be  laid  upon 
the  normal  relation  of  net  income  to  capital  during  pre- 
war years; 

(b)  Corporations  which,  although  their  capitalization 
is  nominal,  employ  a  substantial  amount  of  capital  in 
their  business; 

(c)  A  business  having  a  substantial  capital,  but  whose 
invested  capital  within  the  meaning  of  Sec.  207  is  re- 
duced to  a  nominal  amount  by  the  operation  of  the  re- 
strictive clauses  of  that  section,  e.  g.,  where  the  capital, 
(•(insisting  originally  of  a  small  amount  of  cash  paid  in, 
has  since  appreciated  in  value,  or  where  the  capital  is 
largely  covered  by  indebtedness  or  consists  principally  of 
i ax-free  securities  or  of  intangible  assets  built   up  or 


798  HOLMES   INCOME    TAX   SUPPLEMENT 

developed  by  expenditures  which  have  been  regularly 
deducted  as  items  of  current  expense.50 

RETURNS 

Art.  75.  When  a  return  of  information  as  to  the  in- 
vested capital  and  net  income  for  the  prewar  period 
will  not  be  required. — For  the  purposes  of  the  excess 
profits  tax,  a  return  of  information  with  respect  to  the 
invested  capital  and  net  income  for  the  prewar  period 
will  not  be  required  of  a  corporation,  partnership,  or  in- 
dividual in  the  following  cases : 

(1)  If  the  taxpayer  accepts  the  minimum  percentage, 
viz.,  7  per  cent,  as  the  percentage  to  be  used  in  comput- 
ing the  deduction  under  Art.  21 ;  or 

(2)  If  the  trade  or  business  is  taxable  only  at  the  8 
per  cent  rate  under  Art.  15. 

This  article  must  not  be  construed  as  not  requiring  a 
return  of  information  as  to  all  facts  which  may  be  neces- 
sary for  the  ascertainment  of  the  capital  and  income  for 
the  taxable  year  whenever  such  a  return  is  required  by  the 
Commissioner  of  Internal  Revenue. 

Art.  76.  A  married  woman  may  make  separate  return. 
— A  married  woman  who  is  a  sole  trader  or  is  entitled  to 
any  taxable  income  to  her  sole  and  separate  use  may, 

50  It  will  be  noted  that  these  rulings  do  not  so  much  attempt 
to  define  "nominal  capital"  as  to  define  or  outline  the  kinds  of 
businesses  which  are  or  can  be  carried  on  without  the  use  of 
capital,  except  incidentally,  and  in  which  the  profits  depend 
primarily  on  the  services  of  the  individuals  in  the  business.  If 
the  use  of  capital  is  essential,  and  the  services  of  the  individuals 
are  incidental,  the  business  does  not  come  within  the  purview 
of  Sec.  209,  merely  because  the  amount  of  "invested  capital" 
is  small  as  compared  with  the  profits.  Where  borrowed  money 
enters  largely  into  the  capital  of   the  business,   see  Art.  44. 


WAR    EXCESS   PROFITS    TAX  799 

for  purposes  of  the  excess-profits  tax,  make  a  separate 
return  in  the  same  manner  as  any  other  individual. 

Art.  77.  When  affiliated  corporations  must  furnish 
information  as  to  intercorporate  relations.51 — For  the 
purpose  of  the  excess  profits  tax  every  corporation  will 
describe  in  its  return  all  its  intercorporate  relationships 
with  other  corporations  with  which  it  is  affiliated,  and 
will  furnish  such  information  in  relation  thereto  as  will 
enable  the  Commissioner  of  Internal  Revenue  to  com- 
pute the  amount  of  the  tax  property  due  from  each  cor- 
poration on  the  basis  of  an  equitable  and  lawful  ac- 
counting. 

For  the  purpose  of  this  regulation  two  or  more  cor- 
porations will  be  deemed  to  be  affiliated  (1)  when  one 
such  corporation  owns  directly  or  controls  through  closely 
affiliated  interests  or  by  a  nominee  or  nominees,  all  or 
substantially  all  of  the  stock  of  the  other  or  others,  or 
when  substantially  all  of  the  stock  of  two  or  more  cor- 
porations is  owned  by  the  same  individual  or  partnership, 
and  both  or  all  of  such  corporations  are  engaged  in  the 
same  or  a  closely  related  business;  or  (2)  when  one  such 
corporation  (a)  buys  from  or  sells  to  another  products  or 
services  at  prices  above  or  below  the  current  market, 
thus  effecting  an  artificial  distribution  of  profits,  or  (b) 
in  any  way  so  arranges  its  financial  relationships  with 
another  corporation  as  to  assign  to  it  a  disproportionate 
share  of  net  income  or  invested  capital. 

51  This  and  the  following  paragraph  recognize  the  unity  of 
a  business  carried  on  by  means  of  two  or  more  separate  corpora- 
tions between  which  strict  accounting  of  profits  may  not  have 
been  observed.  By  considering  the  affiliated  corporations  as  a 
unit  and  consolidating  the  invested  capital  and  the  income  of 
all,  an  average  ratio  of  earnings  to  invested  capital  is  reached 
for  the  business  as  a  whole. 


SOO  HOLMES   INCOME   TAX   SUPPLEMENT 

Art.  78.  When  affiliated  corporations  may  be  required 
to  make  consolidated  return. — Whenever  necessary  to 
more  equitably  determine  the  invested  capital  or  taxable 
income,  the  Commissioner  of  Internal  Revenue  may  re- 
quire corporations  classed  as  affiliated  under  Art.  77  to 
furnish  a  consolidated  return  of  net  income  and  invested 
capital.  Where  such  consolidated  return  is  required  it 
may  be  made  by  any  one  or  more  of  such  corporations  or 
by  all  of  them  acting  jointly;  but  if  such  affiliated  cor- 
porations, when  requested  to  file  such  consolidated  re- 
turn, neglect  or  refuse  to  do  so,  the  Commissioner  of 
Internal  Revenue  may  cause  an  examination  of  the  books  ' 
of  all  such  corporations  to  be  made  and  a  consolidated 
statement  to  be  made  from  such  examination.  In  cases 
where  consolidated  returns  are  accepted,  the  total  tax  will 
be  computed  in  the  first  instance  as  a  unit  udqu  the  basis 
of  the  consolidated  return  and  will  be  assessed  upon  the 
respective  affiliated  corporations  in  such  proportions  as 
may  be  agreed  among  them.  If  no  such  agreement  is 
made  the  tax  will  be  assessed  upon  each  such  corporation 
in  accordance  with  the  net  income  and  invested  capital 
properly  assignable  to  it. 

ASSESSMENT    AND    COLLECTION 

Art.  79.  Assessment  and  collection  governed  by  in- 
come tax  regulations. — All  excess  profits  taxes  to  which 
any  taxpayer  is  subject  shall  be  assessed  and  collected 
at  the  same  times  and  in  the  same  manner  as  provided 
with  respect  to  income  taxes  in  the  income  tax  regulations 
in  so  far  as  the  same  are  applicable. 


STAMP    TAX  M)] 

CHAPTER  47 

THE   STAMP   T 

The  presenl  stamp  tax  is  imposed  under  the  provisions 
of  Title  VIII.  of  the  War  Revenue  Act  of  October  3, 
1917.  It  is  to  some  extent  a  re-enactment  of  the  Act 
of  October  22,  1914,  but  contains  several  changes,  ami 
some  of  the  instruments  which  were  taxed  under  the  for- 
mer law  are  omitted,  such  as  bills  of  lading,  express 
receipts,  certificates  of  profit,  certificates  of  damage,  cer- 
tificates of  any  description  not  otherwise  specified, 
1 1 inkers'  notes  or  memoranda  of  sale,  insurance  policies, 
and  protests.  The  present  law  does  not  contain  Schedule 
B  of  the  Act  of  October  22,  1914,  which  provided  for  a 
tax  on  perfumery,  cosmetics  and  similar  articles,  and 
chewing  gum  or  substitutes  therefor.  The  present  law 
went  into  effect  on  December  1,  1917,  except  as  to  the 
tax  on  playing  cards,  which  became  effective  on  October 
I.  1 91 7.  The  phrase  "incidence  of  tax"  is  used  in  this 
chapter  to  mean  the  time  when  the  tax  was  first  applied 
under  the  statute.  A  list  of  the  several  instruments 
taxable  under  the  present  law,  together  with  the  rates  of 
tax  applicable  to  each  and  the  rulings  which  have  been 
made  with  resped  to  each  are  given  in  the  following  para- 
graphs.1 

Bonds  of  Indebtedness.  Bonds,  debentures  or  cer- 
tificates of  indebtedness  issued  on  and  after  December 
1,  1917,  by  any  person,  corporation,  partnership,  or  asso- 
ciation, are  taxable  at  the  rate  of  five  cents  on  each  one 

< 

1  Iu  this  Jist  is  also  included  reference  to  a  number  of  in- 
struments which  are  not  taxable  under  the  present  law.  These 
references  arc  inserted  for  the  convenience  of  the  reader  who 
may  be  searching  for  positive  assurance  that  a  particular  in- 
strument need  not  be  stamped. 


802  HOLMES    INCOME    TAX   SUPPLEMENT 

hundred  dollars  of  face  value  or  fraction  thereof.  Under 
the  former  law 2  the  tax  was  imposed  only  on  bonds 
issued  by  corporations  or  associations.  It  is  to  be  noted 
that  tbe  present  act  imposes  the  tax  on  bonds  issued  by 
persons  and  partnerships  as  well.  There  is  no  clear 
distinction  between  bonds  of  indebtedness  and  promissory 
notes  and  it  is  sometimes  difficult  to  determine  whether 
an  instrument  should  be  taxed  under  the  higher  rate 
applying  to  bonds  of  indebtedness  or  the  lower  rate 
applying  to  promissory  notes.  The  name  on  the  instru- 
ment is  not  always  conclusive.  Thus,  under  the  former 
law  it  was  held  that  an  instrument  designated  asa"  gold 
note"  issued  in  the  amount  of  $1,000  with  interest 
coupons  attached,  and  containing  a  promise  by  a  cor- 
poration to  pay  a  certain  sum  of  money  to  the  holder 
thereof  under  certain  terms  and  conditions  prescribed 
by  the  indenture  of  trust  was  more  in  the  nature  of  a 
bond  or  certificate  of  indebtedness  than  a  promissory  note 
and  was,  therefore,  held  taxable  as  a  bond.3 

Bonds  Given  in  a  Penal  Sum.  When  a  bond  condi- 
tioned for  the  repayment  or  payment  of  money  is  given 
in  a  penal  sum  greater  than  the  debt  secured,  the  tax  is 
based  upon  the  amount  secured  and  not  upon  the  amount 
of  the  bond.4 

Renewal  of  Bonds.  Every  renewal  of  a  bond,  deben- 
ture of  certificate  of  indebtedness  is  taxed  as  a  new  issue.5 

Transfer  of  Bonds.  No  tax  is  imposed  upon  the 
transfer  of  bonds,  debentures  or  certificates  of  indebted- 
ness from  one  holder  to  another. 

2  The  expression  "former  law"  is  used  herein  to  indicate  the 
Act  of  October  22,  1914. 

3  T.   D.   2257.      See   definition    under    Promissory   Notes,   infra. 

4  Act  of  October  3,  1917,  Section  807,  Schedule  A-l. 

5  Id. 


STAMP    TAX  803 

Certificates  of  Deposit.  Certificates  of  deposil  issued 
by  banks  and  trust  companies  are  qoI  taxable  under  this 
bead.6  Such  certificates  were  held  not  to  be  taxable 
iimlcr  the  former  law. 

Issue  of  Bonds.  It  see  as  generally  that  the  delivery 
of  the  bond  establishes  the  date  of  issue.  Thus,  it  was 
held  under  the  former  law  that  bonds  certified  and  de- 
livered by  a  trustee  after  the  incidence  of  the  tax  were 
taxable  although  subscribed  and  paid  for  prior  thereto. 
Under  the  stamp  tax  law  of  1898  it  seems  to  have  been 
held  that  a  bond  was  issued  when  delivery  was  made  and 
the  corporation  received  a  benefit  or  a  consideration 
therefor.7  The  date  of  renewal  would  lie  the  date  of  issue 
for  the  purpose  of  the  tax  on  renewal  of  bonds.8  Bonds 
issued  by  a  domestic  corporation  in  this  country  for  sale 
to  purchasers  in  a  foreign  country  were  held  to  be  issued 
here  for  the  purpose  of  the  tax,  but  bonds  issued  and 
sold  by  a  domestic  corporation  in  a  foreign  country  were 
not  required  to  be  stamped  on  the  ground  that  the  Gov- 
ernment had  no  means  of  enforcing  the  statute  in  such 
case.9 

Where  Stamps  Affixed.  Under  the  former  law  it  was 
held  thai  the  stamps  denoting  the  tax  should  be  affixed 
to  the  bonds,  unless  temporary  bonds  were  issued,  in 
which  case  the  stamps  could  be  affixed  to  the  indenture, 
the  temporary  bonds  and  definitive  bonds  having  printed 
or  engraved  thereon  a  notation  that  the  stamps  were 
affixed  to  the  indenture.10 

6  T.  D.  2054;  letter  from  Treasury  Department  dated  Nov.  16, 
1917. 

7  Volume  1,  Treasury   Decisions  No.  20156. 

8  Every  renewal  is  taxed  as  a  new  issue.  Act  of  October  3, 
1017,  See.  807,  Schedule  A-l. 

9  Letter  from  Treasury  Department  dated  May  15,  1915. 

10  T.  D.  2164,  T.  D.  2220. 

F.I.  TaxSupp.— 10 


804  HOLMES   INCOME   TAX   SUPPLEMENT 

Bonds  of  Indemnity  and  Surety.  Bonds  coming 
within  this  class  are  (a)  bonds  for  indemnifying  any  per- 
son, corporation,  or  partnership,  who  shall  have  become 
bound  or  engaged  as  surety,  (b)  all  bonds  for  the 
due  execution  or  performance  of  any  contract,  obliga- 
tion, or  requirement,  or  the  duties  of  any  office  or  posi- 
tion, and  to  account  for  money  received  by  virtue  thereof, 
and  (c)  all  other  bonds  of  any  description  not  other- 
wise provided  for  in  the  law.  There  are  two  express 
exemptions  from  the  tax  imposed  by  this  subdivision : 
(a)  such  bonds  as  may  be  required  in  legal  proceedings 
and  (b)  policies  of  reinsurance.  The  rate  of  tax  is  fifty 
cents  unless  a  premium  is  charged  for  the  execution 
of  such  bonds,  in  which  case  the  tax  is  one  per  cent 
of  each  dollar  or  fractional  part  thereof  of  the  premium 
charged. 

Bonds  required  in  Legal  Proceedings.  Bonds  of  this 
class  are  not  subject  to  tax  although  they  may  be  bonds 
of  indemnity.  A  bond  filed  by  order  of  court  to  obtain 
a  decree  or  order  for  the  sale  of  real  estate  is  a  bond 
given  in  a  legal  proceeding  and  is  exempt  from  tax. 
Bonds  given  by  court  officers  under  direction  or  authority 
of  the  court,  to  give  proper  effect  to  court  proceedings, 
which  bonds  are  practically  a  part  of  the  record  of  a 
suit  or  proceeding  in  court,  are  not  taxable.  Bonds 
given  in  cases  of  appeal  are  not  taxable.  Bonds  given 
by  executors,  administrators,  guardians  and  receivers  ap- 
pointed by  the  court  are  bonds  required  in  legal  proceed- 
ings and  are  not  taxable.11 

Bonds  given  to  States  and  Political  Subdivisions 
thereof.  Under  the  former  law  it  was  held  on  the 
broad  ground  that  the  sovereign  states  and  subdivisions 

11  T.  D.  2091.     (Act  of  October  22,  1914.) 


STAMP    TAX  805 

thereof  are  constitutionally  free  from  taxation  by  the 
Federal  Government,  that  bonds  given  by  officials  of  a 
state,  township,  county  or  village  for  the  faithful  per- 
formance of  duties,  were  not  taxable.12  Bonds  given  to 
a  State  for  the  performance  of  contracts,  such  as  the 
construction  of  state  or  municipal  buildings,  or  the  dis- 
charge of  other  duties  strictly  for  or  in  behalf  of  the 
State,  when  necessary  to  protect  the  State's  interests, 
were  held  not  subject  to  taxation.12*  A  bond  given  as  a 
condition  to  the  granting  of  a  license  by  a  State  or  politi- 
cal subdivision  is  not  taxable  if  the  license  is  issued  in 
the  exercise  of  the  governmental  powers  of  the  State  or 
political  subdivision.13 

Bonds  given  by  States  and  Political  Subdivisions. 
All  bonds  given  by  states,  townships,  counties  and  subdi- 
visions thereof  are  exempt  from  taxation.14 

Bonds  given  to  the  Federal  Government.  BoihU 
given  to  the  Federal  Government  are  taxable.15 

Bonds  issued  in  foreign  countries.  It  was  held  un- 
der the  former  law  that  bonds  issued  by  guaranty  com- 
panies in  foreign  countries  guaranteeing  the  fidelity  of 
individuals  or  corporations  in  the  United  States,  exe- 
cuted and  delivered  in  the  foreign  country,  were  not 
taxable,  but  if  they  were  not  valid  until  countersigned 
or  delivered  by  the  agent  in  the  United  States,  they 
should  be  taxed.16 

Bonds  delivered  prior  to  incidence  of  tax.  Under  the 

12  t.  D.  2111. 

12a  T.  D.  2072. 

ISAmbrosini  v.  U.  S.,  187  U.  S.  1,  23  Sup.  Ct.  1,  47  L.  Ed. 
49. 

14  T.  D.  2072. 
16  T.  D.  2111. 
16  T.  D.  2051. 


806  HOLMES   INCOME   TAX   SUPPLEMENT 

former  law  it  was  held  that  any  bond  executed  and  de- 
livered prior  to  the  date  on  which  the  tax  was  first 
imposed,  whether  or  not  taking  effect  immediately  or 
subsequent  to  the  enforcement  of  the  taxing  act,  were  not 
subject  to  the  tax.17 

Building  and  Loan  Associations.  Stocks  and  bonds 
issued  by  co-operative  building  and  loan  associations 
which  are  organized  and  operated  exclusively  for  the 
benefit  of  their  members  and  make  loans  only  to  their 
shareholders,  are  not  subject  to  the  tax.18  This  provi- 
sion of  the  law  seems  to  exempt  stock  of  such  associations 
from  the  tax  on  original  issue  and  also  from  the  tax  on 
sales  or  transfers. 

Capital  Stock,  Issue.  Although  the  heading  of  this 
paragraph  is  that  used  in  the  statute,  the  language  of 
the  law  is  that  the  tax  shall  be  imposed  ' '  on  each  original 
issue,  whether  on  organization  or  reorganization,  of 
certificates  of  stock  by  any  association,  company  or  cor- 
poration." The  rate  is  five  cents  on  each  one  hundred 
dollars  of  face  value  or  fraction  thereof,  unless  the  capital 
stock  is  issued  without  face  value,  in  which  case  the  tax 
is  five  cents  per  share,  unless  the  actual  value  of  the 
share  is  in  excess  of  one  hundred  dollars  in  which  case 
the  tax  is  five  cents  on  each  one  hundred  dollars  of  actual 
value  or  fraction  thereof.19  The  tax  is  determined  by  the 
face  value  of  the  certificate. 

Contract  to  issue  stock.    No  stamps  are  required  to 

17  T.  D.  2072. 

18  Act  of  October  3,  1917,  Section  801.  Under  the  former 
law  it  was  held  that  notes  given  to  or  by  such  asociations  were 
taxable.      (T.  D.  2112.) 

19  The  Act  of  October  22,  1914,  was  silent  as  to  shares  without 
par  value  and  it  was  held  under  that  law  that  such  shares  were 
not  subject  to  tax. 


STAMP    TAX  807 

be  affixed  to  a  contract  or  agreement  by  a  corporation 
to  issue  stock.20  It  seems  thai  the  tax  is  on  the  certifi- 
cates of  stock  issued  to  the  shareholders  not  on  the  issue 
of  the  shares. 

Original  issue  op  certificates.  Under  the  former  law- 
it  was  held  that  stock  certificates  issued  in  lieu  of  original 
certificates  in  a  case  where  a  corporation  had  changed  its 
name  were  not  taxable  as  an  original  issue.  Temporary 
or  interim  stock  certificates  issued  before  the  permanent 
cert  ideates  are  taxable  as  original  issue;  the  sube- 
quent  exchange  of  such  temporary  certificates  for  the 
regular  stock  certificates  to  the  same  owner  is  not  sub- 
ject to  any  tax.21  It  was  held  under  the  former  law  that 
where  bonds  had  been  issued  with  the  privilege  of  ex- 
changing the  same  for  certificates  of  stock,  and  the  option 
was  exercised  after  the  incidence  of  the  tax,  the  stock 
certificates  then  issued  were  taxable  as  an  original  issue, 
unless  prior  to  the  incidence  of  the  tax  the  stock  certifi- 
cates in  question  had  been  issued  and  were  held  in  trust 
for  the  purchaser  of  the  bonds,  in  which  case  the  rate 
of  tax  on  transfers  of  stock  was  applicable.22 

Stock  op  foreign  corporations.  Under  the  former 
law  it  was  held  that  certificates  of  stock  sold  or  de- 
livered within  the  United  States  were  subject  to  the  same 
tax  as  certificates  of  stock  of  domestic  corporations  and 
under  the  present  law  it  has  been  held  that  stock  of  a 
corporation  organized  in  a  foreign  country  issued  in  the 
Tinted  States  is  subject  to  the  tax  on  original  issue. 

Where  to  affix  stamps.  The  stamps  representing  the 
tax  imposed  on  the  original  issue  of  stock  are  required 
by  law  to  be  attached  to  the  stuck  hooks  and  not  to  the 

20  T.  D.  2599. 

21  T.  IX  2584. 

22  T.  D.  2155. 


808  HOLMES    INCOME   TAX   SUPPLEMENT 

certificates  issued.23  Where  the  blank  stock  certificates 
are  not  kept  in  a  stock  certificate  book  the  stamps  should 
be  affixed  to  the  books  of  record  in  which  the  issue  of 
stock  is  recorded.24 

Shares  Without  Par  Value.  In  the  case  of  the  issue 
of  certificates  of  stock  without  par  value  it  has  been  held 
that  the  value  of  the  share  for  purpose  of  taxation  will 
be  determined  by  the  statement  of  the  company  and  the 
consideration  involved  in  the  issue  of  such  stock.25 

Capital  Stock,  Sales  and  Transfers.  The  law  pro- 
vides for  a  tax  on  (a)  all  sales,  (b)  agreements  to  sell  or 
memoranda  of  sales  or  deliveries  of  or  transfers  of 
legal 26  title  to  shares  or  certificates  of  stock  in  any  asso- 
ciation, company,  or  corporation.  The  tax  is  imposed 
whether  or  not  the  sale  or  transfer  is  shown  by  the  books 
of  the  association,  company,  or  corporation,  or  is  made 
by  assignment  in  blank,  or  by  any  delivery,  or  by  any 
paper  or  agreement  or  memorandum  or  other  evidence 
of  transfer  or  sale,  whether  entitling  the  holder  in  any 
manner  to  the  benefit  of  such  stock  27  or  not.  The  rate 
of  tax  is  two  cents  on  each  one  hundred  dollars  of  face 
value  or  fraction  thereof  unless  the  shares  of  stock  are 
without  par  value,  in  which  case  the  rate  is  2  cents  on 
each  share  unless  the  actual  value  thereof  is  in  excess 
of  $100  per  share,  in  which  case  the  tax  is  2  cents  on  each 

23  Act  of  October  3,  1917,  Title  8,  Schedule  A,  Subdivision  3. 

24  Letter    from     Treasury    Department    dated     November    20, 

1917. 

25  Letter     from     Treasury    Department    dated    November    26, 

1917. 

26  The  -word  ' '  legal ' '  was  not  contained  in  the  Act  of  October 

22,  1914. 

87  The  Act  of  October  22,  1914,  also  read:  "or  to  secure  the 
future  payment  of  money  or  for  the  future  transfer  of  any 
stock. ' ' 


STAMP    TAX  809 

$100  of  actual  value  or  fraction  thereof.  The  tax  is  de- 
termined by  the  face  value  of  the  certificate  of  stock,  or 
by  the  aggregate  value  of  shares  without  par  value  repre- 
sented by  the  certificate  or  involved  in  the  sale  or  trans- 
fer. Certain  exemptions  are  expressly  made  by  the  Lan- 
guage of  the  law  as  shown  in  the  following  paragraph-. 

Deposit  of  Stock  Certificates  as  Collateral  Se- 
curity. No  tax  is  intended  to  be  imposed  upon  an  agree- 
ment evidencing  a  deposit  of  stock  certificates  as  collateral 
security  for  money  loaned  thereon,  which  certificates  arc 
not  actually  sold,  nor  upon  such  stock  certificates  so  de- 
posited. Under  the  former  law  it  was  held  that  no  tax 
was  imposed  on  stock  deposited  as  collateral  until  com- 
plete title  to  the  certificates  of  stock  was  acquired  by  the 
pledgee.  This  seems  also  to  be  the  rule  under  the  present 
law. 

Transfers  to  or  by  a  Broker.  No  tax  is  imposed  upon 
deliveries  or  transfers  to  a  broker  for  sale,  nor  upon 
deliveries  or  transfers  by  a  broker  to  a  customer  for 
whom  and  upon  whose  order  he  has  purchased  the  same, 
but  such  deliveries  or  transfers  shall  be  accompanied  by 
a  certificate  setting  forth  the  facts.28 

Certificate  by  Broker.  The  following  forms  have 
been  prescribed  for  the  use  of  brokers:  (a)  (in  the  case 
of  a  transfer  to  a  broker)  "We  hereby  certify  that  we 
have  no  ownership,  or  interest,   in   *  shares  of  the 

stock  above  transferred,  the  transfer  by  the  owner  to 
us  being  merely  for  the  purpose  of  sale,"  (b)  (in  the 
case  of  a  transfer  by  a  broker)  "We  hereby  certify  that 
the  transfer  of  *  *  *  of  the  within  shares  to  the  names 
indicated    by    the    star    is    made    solely    to    complete   the 

28  Act  of  October  3,  1917,  Section  807,  Schedule  A,  Subdivi- 
sion 4. 


810  HOLMES   INCOME   TAX   SUPPLEMENT 

purchase  made  by  us  for  our  customer,  and  we  have  no 
ownership  or  interest  therein."  No  broker  who  has  filed 
a  certificate  under  the  foregoing  clause  (a)'  of  this  ruling 
should  file  a  certificate  under  the  foregoing  clause  (b) 
with  reference  to  the  transfer  of  any  shares  of  stock 
covered  by  the  certificate  filed  by  him  under  clause  (a)29 
Transfers  to  Clearing  House.  No  tax  is  imposed  up- 
on transfers  or  deliveries  to  a  clearing  house  for  the  sole 
purpose  of  clearing  or  adjusting  accounts  between  mem- 
bers, where  no  beneficial  interest  is  vested  in  said  clearing 
house  or  clearing  association  and  there  has  been  no 
change  of  title  or  interest:  Provided,  the  exchange,  by 
appropriate  by-laws  or  regulations,  requires  from  its 
members  that  all  transactions  of  such  members  in  shares 
of  stock  be  promptly  reported  to  such  clearing  house  to 
the  end  that  the  stamp  taxes  thereon  may  be  collected 
and  that  no  other  clearances  or  settlements  or  trading 
in  balances  are  permitted.30 

Formal  Transfers  Where  no  Change  of  Title  Takes 
Place.  The  act  does  not  seem  to  contemplate  a  tax  unless 
there  is  a  transfer  of  legal  title  to  the  shares  or  certifi- 
cates. Hence,  it  would  seem  that  the  following  rulings 
made  under  the  former  law  would  be  applicable  to  the 
present  law :  Where  a  new  corporation  was  formed  for 
the  purpose  of  reorganization  the  stock  certificates  of  the 
new  company  were  held  subject  to  tax  as  original  issue 
but  the  exchange  of  certificates  of  the  old  company  for 
certificates  of  the  new  company  to  the  same  person  were 
held  not  taxable  as  transfers.  In  the  case  of  a  merger 
it  was  held  that  the  exchange  of  stock  of  the  old  com- 
panies for  stock  of  the  new  company  resulting  from  the 

29  Regulations  40,  Art.   5. 

30  Regulations  40,  Art.  5. 


STAMP    TAX  SI  1 

merger  were  not  subject  to  the  transfer  tax.  Where  upon 
reorganization  new  stock  was  issued  to  a  broker  and  sub- 
sequently trans t'ciicd  by  the  broker  to  his  customer  no 
lax  was  imposed  upon  the  transfer.  It  was  also  held  that 
preferred  stock  issued  in  lieu  of  common  stock  was  not 
taxable  when  there  was  no  change  of  ownership. 

Stock  Redeemed  by  the  Issuing  Corporation.  Under 
the  former  law  it  was  held  that  where  stock  was  redeemed 
by  a  corporation  the  transfer  from  the  stockholder  to 
the  corporation  was  subject  to  tax  whether  or  not  the 
stockholder  merely  surrendered  the  certificate  for  can- 
cellation or  executed  the  assignment  on  the  back  of  the 
certificate. 

Loan  of  Certificates  of  Stock.  Where  stock  was  sold 
in  the  regular  way  but  delivery'  could  not  be  consum- 
mated because  of  non-arrival,  and  stock  was  borrowed  for 
the  purpose  of  making  delivery,  the  borrowed  stock  being 
subsequently  returned  to  the  lender,  it  was  held  under 
the  former  law  that  no  stamps  were  required  either  upon 
the  lending  of  the  certificates  or  the  return  of  borrowed 
certificates  to  the  lender.  It  was  required  that  a  certifi- 
cate should  be  attached  to  such  transfers  to  the  effect 
that  they  were  exchanges  on  account  of  accommodation 
loans  that  in  accordance  with  the  ruling  of  the  Treasury 
I  department  documentary  stamps  were  not  required.31 

Transfers  to  and  by  Fiduciaries.  Under  the  former 
law  it  was  held  that  transfers  from  a  deceased  to  his 
executor  or  administrator  were  not  taxable.  Transfers 
from  a  trustee  to  a  substitute  trustee  were  not  taxable 
but  transfers  from  an  executor  or  administrator  to  a 
trustee  were  taxable  as  were  also  transfers  from  the 
trustee  to  the  beneficiary  under  the  trust.    It  would  seem, 

31  T.   P.    2182. 


812  HOLMES   INCOME   TAX   SUPPLEMENT 

however,  that  under  the  present  law  transfers  of  legal 
title  are  taxable  whether  or  not  the  transferee  acquires 
any  beneficial  interest  in  the  stock. 

Where  Title  to  the  Stock  Passed  Prior  to  the  Inci- 
dence of  the  Tax.  No  tax  is  imposed  upon  the  transfer 
of  such  stock  on  the  books  of  a  corporation  although 
made  after  the  date  on  which  the  tax  was  first 
imposed.32 

Transfer  of  Stock  Before  Issue  of  Certificate.  The 
existence  of  a  stock  certificate  is  not  essential  in  order  to 
make  the  transfer  of  shares  subject  to  the  tax.  A  trans- 
fer affecting  a  change  of  ownership  of  the  shares  whether 
made  before  or  after  the  issuance  of  the  original  cer- 
tificates is  taxable.33  Under  the  1914  Law  it  was  held 
that  transfers  of  subscription  warrants  entitling  the 
holder  to  certificates  of  stock  were  taxable  as  transfers 
of  stock. 

Rights  to  Subscribe  to  Stock.  A  right  to  subscribe  to 
additional  stock  is  neither  a  share  of  stock  nor  a  certifi- 
cate of  stock  and  hence  a  transfer  thereof  is  not  taxable. 
Under  the  former  law  it  was  held  that  the  transfer  of 
such  rights  were  not  taxable.34  Under  the  present  law 
"rights"  are  included  in  the  definition  of  the  term 
"share  or  shares  of  stock"  34a  but  it  is  doubtful  if  a  tax 
can  be  legally  exacted  on  transfers  of  such  rights. 

Shares  Without  Par  Value.  The  law  provides  that 
the  tax  shall  be  imposed  at  the  rate  of  two  cents  a  share 
unless  the  actual  value  of  the  share  is  in  excess  of  one 
hundred  dollars,  in  which  case  the  tax  shall  be  two  cents 

32  Letter  from  Treasury  Department  dated  November  30,  1917. 
This   was   also   the   rule  under  the  former  law. 

33  T.  D.   2599. 

34  Letter  from  Treasury  Department  dated  March  12,  1915. 
34a  -Reg.  No.  40,  Part  1,  Art.  1. 


STAMP    TAX  813 

on  each  one  hundred  dollars  of  actual  value  or  fraction 
thereof.  The  actual  value  of  shares  without  par  value 
is  determined  by  the  market  value  at  the  time  of  the 
sale  or  transfer,  which  value  is  considered  by  the 
Treasury  Department  to  be  the  actual  value.35 

Tax  Paid  But  Once.  Where  shares  of  stock  are  sold 
and  the  tax  has  been  paid  and  stamps  affixed  to  a  bill  or 
memorandum  of  sale,  stamps  are  not  again  required 
when  the  transfer  is  made  on  the  books  of  the  company 
from  the  name  of  the  party  selling  to  the  name  of  the 
purchaser.36 

Memorandum  op  Sales.  Every  person  who  makes 
sales,  or  agreements  to  sell,  or  memoranda  of  sales  or 
deliveries  of,  or  transfers  of  the  legal  or  beneficial  title 
to  shares  of  stock,  at,  in  or  on  any  exchange  or  similar 
place  of  business,  and  every  person  who  makes  any  agree- 
ment to  sell  stock  or  makes  a  transfer  of  stock  by  delivery 
of  the  certificate  therefor  assigned  in  blank,  shall  as  a 
part  of  every  such  transaction,  promptly  make  and  de- 
liver to  the  buyer  a  bill,  or  memorandum  of  sale,  or 
agreement  to  sell,  duly  signed  by  the  principal  or  his 
agent,  which  shall  show  the  date  of  the  transaction  evi- 
denced by  it,  the  names  of  the  seller  and  buyer,  the  shares 
of  stock  to  which  it  relates,  the  number  of  shares  and 
the  price  per  share  of  said  stock,  and  shall  bear  a  num- 
ber upon  the  face  thereof.  No  more  than  one  such  bill 
or  memorandum  made  by  the  seller  on  any  given  day 
shall  bear  the  same  number;  Provided,  however,  that 
no  single  transaction  of  a  purchase  or  sale  that  is  made 
upon  an  exchange  by  one  member  for  another  member 

35  Letter  from  Treasury  Department  dated  November  26,  1917. 

36  T.  D.  2073. 


S14  HOLMES   INCOME   TAX   SUPPLEMENT 

shall  require  to  be  evidenced  by  more  than  one  stamped 
memorandum  of  sale  or  agreement  to  sell.37 

Stock  of  Foreign  Corporations.  When  certificates 
of  stock  of  a  foreign  corporation  are  sold  or  delivered 
within  the  United  States  they  are  subject  to  the  same 
tax  as  certificates  of  stock  of  a  domestic  corporation.38 

Voting  Trust  Certificates.  Under  the  Act  of  Octo- 
ber 22,  1914,  it  was  held  that  the  transfer  of  the  title  to 
stock  to  voting  trustees,  the  transfer  back  to  the  stock- 
holder at  the  termination  of  the  voting  trust,  and  any 
and  all  transfers  of  the  voting  trust  certificates  during 
the  period  of  the  trust  were  subject  to  tax  as  transfers  of 
stock.39  It  has  also  been  so  ruled  under  the  present 
law.39a 

Affixing  and  Cancellation  of  Stamps.  In  case  the 
transfer  is  effected  by  delivery  of  the  certificate  of  stock 
assigned  in  blank  the  stamp  shall  be  affixed  to  the  bill, 
memorandum,  or  agreement  to  sell. 

In  case  the  change  of  ownership  is  by  transfer  of  the 
certificate  of  stock,  the  stamp  shall  be  affixed  to  the  cer- 
ti fir-ate,  and  in  no  event  shall  any  company  or  registrar 
or  transfer  agent  accept  or  transfer  any  shares  of  stock 
or  certificates  therefor  unless  stamps  for  all  transfer 
tax  required  to  be  affixed  to  the  certificate  are  attached 
thereto  properly  canceled. 

In  case  the  evidence  of  the  transfer  is  shown  only  by 
the  books  of  the  company  the  stamp  shall  be  placed  upon 
the  books. 

In  all  other  cases  the  payment  shall  be  evidenced  by 

37  Regulations  40,  Art.  6. 

38  T.  D.  2073. 

39  Letter  from  Treasury  Department  dated  January  7,  1915. 
39a  Reg.  No.  40,  Part  1,  Art.  1. 


STAMP    TAX  815 

affixing  the  stamp  upon  the  memorandum  or  agreement 
of  sale  to  be  delivered  by  the  seller  to  the  buyer. 

The  person  using  or  affixing  a  stamp  shall  write  or 
stamp  thereon,  in  ink,  his  initials,  and  the  day,  month, 
and  year  on  which  the  same  shall  be  used,  or  affixed,  or 
shall  by  cutting  or  cancelling  said  stamp  with  a  machine 
or  punch  affixing  his  initials  and  date  as  aforesaid,  so 
deface  the  stamp  as  to  render  it  unlit  for  reuse.  In  ad- 
dition to  the  foregoing,  stamps  of  the  value  of  ten  cents 
or  more  shall  have  three  parallel  incisions  made  by  some 
sharp  instrument  lengthwise  through  the  stamp  after 
the  same  has  been  attached  to  the  bill,  memorandum,  or 
other  evidence  of  sale  or  transfer  of  stock,  provided  this 
will  not  be  required  where  stamps  are  canceled  by  perfor- 
ation. The  cancellation  by  either  method  should  not  so 
deface  the  stamp  as  to  prevent  its  denomination  and  gen- 
uineness from  being  readily  determined.40 

Registration  of  Stock  Brokers.  Stock  brokers, 
transfer  agents  and  clearing  houses  are  required  to  regis- 
ter with  the  collector  of  internal  revenue  and  to  keep 
records  of  sales  and  transfers  as  more  fully  set  forth  in 
a  subsequent  part  of  this  chapter.40* 

Certificates  of  Deposit.  Certificates  of  deposit  is- 
sii"d  by  banks  and  trust  companies  are  not  considered  to 
be  taxable  as  certificates  of  indebtedness,  whether  or  not 
they  are  time  certificates,  or  contain  a  clause  reserving 
the  right   of  thirty  days'  notice  of  payment.41 

Certificates  of  indebtedness.  See  bonds  of  indebted- 
ness. 

Certificates  of  Stock.    See  capital  stock. 

40  Reg.  40,  Art.  7. 
40a  See  page  837. 

41  Letter  from  Terasury  Department  dated  November  16,  1917. 


816  HOLMES   INCOME   TAX   SUPPLEMENT 

Certificates  Generally.  No  tax  is  imposed  under  the 
present  law  on  certificates  of  incorporation,  certificates 
of  damage,  certificates  of  profit  and  certificates  generally. 

Checks.  No  tax  is  imposed  on  checks  payable  at 
sight  or  on  demand.  Drafts  or  checks  payable  otherwise 
than  at  sight  or  on  demand  are  taxable  at  the  same  rate 
as  promissory  notes.    See  promissory  notes. 

Contracts.  No  tax  is  imposed  by  the  present  law  on 
contracts  as  snch.  ^ 

Conveyances.  The  law  taxes  any  deed,  instrument 
or  writing,  whereby  any  lands,  tenements,  or  other  realty 
sold  shall  be  granted,  assigned,  transferred,  or  otherwise 
conveyed  to,  or  vested  in,  the  purchaser  or  purchasers, 
or  any  other  person  or  persons,  by  his,  her,  or  their  di- 
rection. The  tax  is  based  upon  the  consideration  or  value 
of  the  interest  or  property  conveyed,  exclusive  of  the 
value  of  any  lien  or  incumbrance  remaining  thereon  at 
the  time  of  sale.  The  rate  is  as  follows :  When  such  con- 
sideration or  value  does  not  exceed  one  hundred  dollars, 
no  tax;  exceeding  one  hundred  dollars  and  not  exceed- 
ing five  hundred  dollars,  fifty  cents;  for  each  additional 
five  hundred  dollars  or  fractional  part  thereof  fifty  cents. 
The  tax  does  not  apply  to  any  instrument  or  writing 
given  to  secure  a  debt. 

Contracts  to  Convey.  A  contract  for  the  sale  of  real 
estate,  making  provision  for  future  delivery  by  deed,  is 
not  subject  to  stamp  tax.43 

Realty  Sold.  The  law  provides  that  deeds  whereby 
any  realty  sold  shall  be  conveyed  to  another  are  taxable. 
Hence,  it  seems  that  if  the  realty  is  not  sold  no  stamps 
need  be  affixed  to  the  deed.     The  word  "sold"  is  used 

42  T.  D.  2599. 

43  T.  D.  2599,  T.  D.  2115. 


STAMP   TAX  817 

in  its  ordinary  meaning  and  acceptation.  There  musl 
be  a  transfer  of  a  valuable  interest  in  the  property  or 
payment  of  a  consideration.  Thus  it  has  been  held  under 
former  laws  that  deeds  that  are  simply  confirmatory  and 
do  not  vest  title  not  already  vested  are  not  taxable.44 
A  quit-claim  deed  given  for  no  consideration,  or  merely 
for  the  nominal  consideration  of  $1.00,  for  the  purpose  of 
correcting  a  flaw  in  title  is  not  subject  to  tax.46  A  par- 
tition deed  which  is  operated  in  defining  boundary  lines 
or  by  showing  by  location  the  tenant-in-eommon  's  inter- 
est is  not  subject  to  tax.46  Deeds  of  release  are  exempt 
from  the  tax  .47  Deeds  of  trust  are  not  subject  to  the 
tax.48  A  deed  issued  to  cover  a  gift  of  property  from 
husband  to  wife  or  from  parent  to  child,  or  from 
an  individual  to  a  municipality  or  other  political 
subdivision,  wherein  the  consideration  named  is  ''nat- 
ural love  and  affection  and  $1.00."  "Desire  to  pro- 
mote public  welfare  and  $1.00"  or  "$1.00  and  other 
valuable  consideration"  is  not  taxable.49  If  a  deed  does 
not  grant,  assign,  transfer,  or  convey  to  the  purchaser 
any  lands,  tenements,  or  other  realty,  but  only  the  right 
to  burial,  to  erect  monuments,  etc.,  it  does  not  require 
a  stamp.50  Where  lands  are  conveyed  by  deed  to  an 
agent  for  an  undisclosed  principal  and  the  property  is 
immediately  reconveyed  to  the  principal  by  the  agent, 
no  tax  is  imposed  on  the  conveyance  to  the  principal  if 

44  Circular  No.  503,  2d  revision.   Compilation  of  decisions  for 
year  1899,  p.  293. 

45  T.  D.  2115. 

46  T.  D.  2115. 

47  T.  D.  2115. 

48  T.  I).  2115. 

49  T.  D.  2115. 

50  T.  D.  19838. 


818  HOLMES   INCOME   TAX   SUPPLEMENT 

no  consideration,  or  a  nominal  consideration  of  $1.00 
only  is  given.  A  deed  executed  by  a  debtor  covering  an 
assignment  of  property  to  a  trustee  to  be  held  for  the 
benefit  of  creditors  is  not  subject  to  tax.  When,  however, 
the  trustee  sells  or  conveys  such  property  either  to  the 
creditor,  or  any  other  person,  the  deeds  executed  by  him 
are  taxable.51  A  deed  given  by  a  husband  and  wife  to  a 
"straw  man"  who  immediately  executes  a  deed  recon- 
veying  the  property  to  the  husband  or  the  wife  is  not 
subject  to  tax  if  no  valuable  consideration,  or  merely  the 
nominal  consideration  of  $1.00  is  given,  and,  likewise, 
the  deed  of  reconveyance  is  exempt.52  A  deed  transferring 
title  to  property  to  a  building  and  loan  association  for 
the  purpose  of  securing  a  loan  on  the  property  so  con- 
veyed, which  property  is  immediately  reconveyed  to  its 
owner  is  not  subject  to  tax ;  the  deed  of  reconveyance  be- 
ing likewise  exempt.53 

Mining  Deeds.  Conveyance  of  a  mine  located  on  un- 
patented land  is  subject  to  taxation.54  The  foregoing  rul- 
ing was  made  under  the  Act  of  1898.  Under  the  Act  of 
October  22,  1914,  it  was  held  by  the  Treasury  Depart- 
ment in  an  informal  ruling  that  deeds  to  mining  claims 
prior  to  the  issue  of  the  patent  were  taxable  upon  trans- 
fer as  conveyances  of  real  property.  The  tax  should  be 
computed  upon  the  interest  in  the  property  conveyed 
which  would  be  the  market  value  of  the  stock  issued  there- 
for, or  if  it  had  no  market  value,  the  cash  value  of  the 
mining  claim.55 

Property  in  a  Foreign  Country.     A  deed  of  convey- 

51  T.  D.  2115. 

52  T.  D.  2115. 

53  T.  D.  2115. 

54  Vol.  1,  Treas.  Dec.   (1899),  No.  20986. 

55  Letter   from   Treasury  Department   dated   August  3,   1916. 


STAMP   TAX  819 

ance  conveying  real  estate  that  lies  in  countries  that  are 
not  United  States  territory  is  not  subject  to  taxation, 
though  the  grantor  and  grantee  may  both  be  citizens  and 
residents  of  the  United  States.66 

Leases.  Oil  leases,  leases  of  mining  property,  long- 
term  mining  leases,  etc.,  which,  in  themselves,  convey  no 
title  to,  or  interest  in,  real  property  are  exempt  from 
taxation.67 

Options.  No  tax  is  imposed  upon  an  option  for  the 
purchase  of  real  property.68 

Deeds  Given  by  States  and  Political  Subdivisions. 
Deeds  executed  by  a  State,  county,  town  or  other  munic- 
ipal corporation  are  not  taxable.69 

Deeds  Given  by  Officers  of  Courts.  Stamps  should 
be  attached  to  masters'  deeds  made  pursuant  to  decree  of 
United  States  District  Courts.  The  execution  of  the 
conveyance  is  not  a  judicial  function,  the  title  to  the 
land  being  conveyed  to  the  purchaser  at  the  foreclosure 
sale  through  the  master  instead  of  the  defendant  him- 
self making  the  deed.  The  cost  of  stamps  should  be 
taxed  as  a  part  of  the  costs  of  the  case.60 

Consideration  or  Value.  The  tax  is  imposed  upon 
the  full  amount  of  consideration  or  value  although  pay- 
ments may  have  been  made  upon  the  installment  plan 

56  Vol.  2,  Treas.  Dee.  (1898),  No.  21562.  It  was  also  so  held 
under  the  Aet  of  October  22,  1914. 

57  T.  D.  2155,  T.  D.  2599. 

58  T.  D.  2115. 

59  T.  D.  2283. 

60  T.  D.  2111,  T.  D.  225:?;  Crawford  v.  New  South  Farm  & 
Home  Company,  231  Fed.  999.  This  ease  was  decided  under  the 
Act  of  October  22,  1914,  and  it  was  held  that  the  decision  in 
Farmers'  Loan  and  Trust  Company  v.  Council  Bluffs  Gas  &  Elec- 
tric Company,  90  Fed.  806,  decided  under  the  Act  of  June  13, 
1898,   was  applicable. 

F.  I.  Tax  Supp.— 11 


820  HOLMES   INCOME    TAX   SUPPLEMENT 

prior  to  the  incidence  of  the  tax.61  Quit-claim  deeds  are 
taxable  according  to  value  of  the  interest  conveyed.62 
Stock  in  a  corporation  is  a  valuable  consideration 
for  the  transfer  of  real  property,  and  a  deed  con- 
veying real  estate  to  a  corporation  for  such  consideration 
is  taxable.  The  value  of  the  interest  in  the  property  con- 
veyed determines  the  amount  of  the  tax.63  Where  a  deed 
states  that  the  transfer  is  made  for  a  nominal  considera- 
tion the  tax  must  be  computed  upon  the  actual  value  of  the 
interest  or  property  conveyed.64  In  a  case  of  an  exchange 
of  two  properties  the  deeds  transferring  title  to  each  are 
subject  to  tax,  which  should,  in  each  case,  be  computed 
on  the  basis  of  the  actual  value  of  the  interest  or  property 
conveyed  (exclusive  of  the  value  of  any  lien  or  incum- 
brance remaining  thereon  at  the  time  of  exchange).65 

Incumbrance  on  Property  at  the  Time  op  Sale. 
The  consideration  or  value  on  which  the  tax  is  based  is 
exclusive  of  the  value  of  any  lien  or  incumbrance  remain- 
ing thereon  at  the  time  of  sale.  The  words  in  italics 
were  not  contained  in  the  former  law  and  it  seems  were 
inserted  to  limit  the  exclusion  to  liens  or  incumbrances 
other  than  purchase  money  mortgages.  In  determining 
the  amount  of  incumbrance  upon  real  estate  being  trans- 
ferred, no  consideration  is  to  be  given  to  new  incum- 
brances placed  upon  same  at  the  time  of,  or  after,  the 
sale.  Only  incumbrances  which  rest  on  the  property  be- 
fore the  sale  and  which  are  not  removed  by  the  sale 
are  to  be  taken  into  consideration.65* 


61  T. 

D. 

2279. 

62  T. 

D. 

20232. 

63  T. 

D. 

2278. 

64  T. 

D. 

2115. 

65  T. 

D. 

2111, 

T. 

D. 

2599 

65a  T 

.  D 

.  2599. 

STAMP    TAX  821 

When  Stamps  Affixed.  It  seems  that  the  stamps 
should  be  affixed  at  the  time  of  delivery  of  the  deed.  It 
was  held  under  the  former  law  that  a  deed  in  escrow 
does  not  become  subject  to  the  tax  until  the  final  delivery 
is  made.  If  such  delivery  is  made  subsequent  to  the  inci- 
dence of  the  tax  it  becomes  subject  to  the  tax.66  A  deed 
executed  and  delivered  prior  to  the  incidence  of  the  tax 
is  not  subject  to  the  tax  although  recorded  after  that 
date.67  Deeds  delivered  after  the  incidence  of  the  tax 
must  be  stamped  although  they  may  have  been  dated, 
executed  and  acknowledged  prior  thereto  and  even 
though  delivered  prior  thereto  to  a  third  party  for  ac- 
count of  the  grantee  named  in  the  deed,  if  delivery  by 
such  party  to  the  grantee  is  made  after  the  incidence  of 
the  tax.68 

Who  Affixes  Stamps.  The  person  who  executes  the 
deed  (i.  e.,  the  grantor)  is  required  to  affix  the  stamps 
thereto  and  becomes  liable  to  penalty  if  stamps  in  a  suf- 
ficient amount  based  upon  the  actual  value  of  the  con- 
sideration given  are  not  so  affixed.69  In  a  case  where  the 
referee  at  a  foreclosure  sale  did  not  affix  the  stamps  re- 
quired by  law  but  the  purchaser  affixed  such  stamps  un- 
der protest  before  recording  the  deed,  it  was  held  that 
the  grantee,  vendee  or  any  other  person  participating 
in  the  making  or  issuing  of  a  paper  without  revenue 
stamps  may  be  required  to  pay  the  tax  thereon  and  is 
liable  for  failure  to  do  so.70 

"Where  Stamps  Are  Affixed.     The  stamps  should  be 

66  T.  D.  2115.     So  also  held  in  Vol.  2,  Treas.  Dec.   (1898)  No. 


T.  D.  2283. 
310;    Home   Title   Insurance   Company   v.    Keith,  230 


20096. 

67  T.  D. 

2115 

68  T.  D. 

2042, 

69  T.  D. 

2115 

70  T.  D. 

2310 

Fed.  905. 

822  HOLMES   INCOME   TAX   SUPPLEMENT 

affixed  on  the  deed  or  other  instrument  conveying  the 
real  estate.71 

Debentures.     See  bonds  of  indebtedness. 

Deeds.     See  conveyances. 

Drafts.  Drafts  drawn  at  sight  or  on  demand  are  not 
taxable.  Drafts  drawn  payable  "on  arrival  of  goods"  or 
in  any  other  form  than  at  sight  or  on  demand  are  sub- 
ject to  the  tax  if  drawn  in  the  United  States,  unless 
drawn  against  exports  in  which  case  they  are  held  not  to 
be  taxable  in  view  of  the  constitutional  prohibition 
against  tax  on  exports.  Drafts  drawn  in  foreign  coun- 
tries and  paid  within  the  United  States  are  not  taxable.72 
The  taxability  of  the  draft  is  determined  by  the  face  or 
form  of  the  instrument  and  not  by  any  understanding 
between  the  maker  and  the  drawee.  For  rate  of  tax  and 
rulings  regarding  taxable  drafts  see  Promissory  Notes. 

Entry  for  Withdrawal  of  Goods  or  Merchandise  from 
Customs  Bonded  Warehouse.  The  tax  on  instruments 
of  this  character  is  fifty  cents.  Under  the  former  law 
it  was  held  that  withdrawals  for  transportation  and  ex- 
portation  were  not  taxable  in  view  of  the  constitutional 
provision  prohibiting  taxation  upon  exports.  It  was  also 
held  that  where  entries  were  filed  in  duplicate,  triplicate, 
etc.,  a  stamp  was  required  on  the  original  only.73 

Entry  of  Goods,  Wares  or  Merchandise  at  Custom- 
house. The  law  provides  that  entry  of  any  goods, 
wares  or  merchandise  at  any  custom-house,  either  for 
consumption  or  warehousing,  shall  be  taxed  as  follows : 

Not  exceeding  one  hundred  dollars  in  value,  twenty- 
five  cents;  exceeding  one  hundred  dollars  and  not  ex- 
ceeding five  hundred  dollars  in  value,  fifty  cents ;  exceed- 

71  T.  D.  2599. 

72  Letter  from  Treasury  Department  dated  November  27,  1917. 
78  T.  D.   (Customs)  35040. 


STAMP    TAX  823 

ing  five  hundred  dollars  in  value,  one  dollar.  Under  the 
former  law  it  was  held  that  entries  covering  merchandise 
imported  solely  for  governmental  purposes  were  not  tax- 
able nor  were  entries  covering  merchandise  imported  for 
the  benefit  of  foreign  ministers,  embassadors  or  their 
attaches,  even  though  the  entries  covering  such  articles 
w  ere  made  by  customs  brokers.74 

Interim  Certificates.     See  Capital  Stock. 

Leases.     Leases  are  not  taxed  under  this  law. 

Mortgages.     Mortgages  are  not  taxed  under  this  law. 

Mutual  Ditch  and  Irrigation  Companies.  Stocks  and 
bonds  issued  by  mutual  ditch  or  irrigation  companies  are 
not  taxable.75  This  exemption  does  not  extend  to  bonds 
or  notes  of  such  companies. 

Original  Issue  of  Stock.     See  Capital  Stock,  Issue. 

Parcels-Post  Packages.  The  tax  is  imposed  upon 
every  parcel  or  package  transported  from  one  point  in 
the  United  States  to  another  by  parcel  post  on  which  the 
postage  amounts  to  twenty-five  cents  or  more.  The  tax 
is  at  the  rate  of  one  cent  for  each  twenty-five  cents  of 
postage  or  fractional  part  thereof.  The  law  requires 
the  tax  to  be  paid  by  the  consignor.  It  is  to  be  noted  that 
the  tax  is  only  on  parcels  and  packages  transported 
from  one  point  to  another  in  the  United  States.  Pack- 
ages transported  to  foreign  countries  are  not  taxable. 
Parcels  transported  from  this  country  to  Porto  Rico  or 
other  possessions  are  not  taxable  and  packages  trans- 
ported from  one  point  to  another  in  such  possessions  are 
not  taxable.76 

Passage  Tickets.  The  tax  on  passage  tickets  is  only 
imposed  on  tickets  sold  or  issued  in  the  United  States  for 

74  T.  D.   (Customs)   35072. 

75  Act  of  October  3,  1917,  Section  801. 

76  T.  D.  2599. 


824  HOLMES   INCOME    TAX   SUPPLEMENT 

passage  by  any  vessel  to  a  port  or  place  not  in  the  United 
States,  Canada  or  Mexico.  Such  tickets  are  required  to 
be  stamped  whether  they  are  one-way  or  round-trip.  No 
tax  is  imposed  on  tickets  costing  ten  dollars  or  less.  The 
intent  seems  to  be  to  impose  a  tax  for  each  passenger 
based  upon  the  cost  of  the  ticket.  The  rate  is  one  dollar 
if  the  cost  of  the  ticket  does  not  exceed  thirty  dollars; 
three  dollars  if  the  cost  of  the  ticket  exceeds  thirty  dol- 
lars and  does  not  exceed  sixty  dollars,  and  five  dollars  if 
the  cost  of  the  ticket  exceeds  sixty  dollars.  Where  a 
single  ticket  is  issued  for  transportation  for  more  than 
one  passenger  the  ticket,  coupon  or  prepaid  order  must 
be  stamped  at  the  proper  rate  for  each  passenger  based 
on  the  number  of  passengers  and  the  total  amount  paid 
for  the  transportation.77  It  is  the  duty  of  the  person 
selling  the  ticket  to  affix  and  cancel  the  stamp  to  the 
ticket  or  paper  which  evidences  the  sale.78  Under  for- 
mer stamp  tax  laws  it  has  been  held  that  tickets  used  by 
members  of  foreign  diplomatic  corps  were  not  required 
to  be  stamped.79 

Playing  Cards.  An  additional  tax  of  five  cents  per 
pack  is  imposed  upon  every  pack  of  playing  cards  con- 
taining not  more  than  fifty-four  cards,  manufactured  or 
imported,  and  sold  or  removed  for  consumption  or  sale, 
after  the  passage  of  the  act. 

Powers  of  Attorney.  Powers  of  attorney  are  taxable 
instruments  under  this  law  if  they  are  such  that  they 
grant  authority  to  do  or  perform  some  act  for  or  in  be- 
half of  the  grantor,  which  authority  is  not  otherwise 
vested  in  the  grantee.  The  rate  of  tax  is  twenty -five  cents. 
The  law  expressly  provides  that  no  stamps  shall  be  re- 

77  T.  D.  2067. 

78  T.  D.  2067. 

79  Volume  2,  Treas.  Dec.   (1898)  No.  20196. 


STAMP    TAX  825 

quired  on  any  papers  necessary  to  be  used  for  the  collec- 
tion of  claims  from  the  United  States  or  from  any  State 
for  pensions,  back-pay,  bounty,  or  for  property  lost  in  the 
military  ami  naval  service.  Powers  of  attorney  required 
in  bankruptcy  cases  are  also  expressly  exempted. 

Kormal  I'owKks  of  Attorney.  Powers  of  attorney 
which  are  merely  formal  and  grant  no  authority  which  is 
not  otherwise  vested  in  the  grantee  are  not  taxable.  Thus, 
it  has  been  held  that  no  tax  is  imposed  upon  powers  of 
attorney  in  the  following  cases : 

Assignment  of  Insurance  Policies.  No  stamp  tax 
is  imposed  upon  the  power  of  attorney  contained  in  a 
transfer  by  assignment,  absolute  or  as  collateral  security, 
of  an  interest  in  a  contract  of  insurance,  if  the  power  of 
attorney  grants  authority  to  do  or  perform  only  such 
acts  for  or  in  behalf  of  the  assignor  as  are  otherwise 
vested  in  the  assignee.80 

To  Pay  Poll  Taxes.  Powers  of  attorney  issued  in 
accordance  with  the  provisions  of  State  statutes  authoriz- 
ing a  person  to  pay  a  poll  tax  of  an  individual  are  not 
resuired  to  be  stamped.81 

Power  of  Sale.  The  power  of  sale  generally  embodied 
in  a  mortgage,  real  or  chattel,  and  deed  of  trust,  differs 
from  a  power  of  attorney  in  many  respects,  one  of  which 
is  that  the  latter  always  creates  an  agency  or  a  repre- 
sentative relation,  whereas  a  mortgagee  under  a  power 
of  sale  acts  on  his  own  behalf  and  for  his  own  benefit. 
Such  power  of  sale  is  not  taxable  as  a  power  of  attor- 
ney.82 

Power  of  Attorney  to  Transfer  Stocks.  Proforma 
powers  of  attorney  to  transfer  stocks  or  bonds  on  the 

80  T.  D.  2599. 

81  T.  D.  2269. 

82  T.  D.  2196. 


826  HOLMES  INCOME   TAX  SUPPLEMENT 

books  of  a  corporation  given  to  the  purchaser  upon  the 
sale  or  transfer  of  such  stocks  or  bonds  are  not  taxable.83 

Power  of  Attorney  Granted  by  Corporation. 
Where  a  corporation  by  resolution  of  its  Board  of  Di- 
rectors has  empowered  an  officer  thereof  to  sell,  assign 
or  transfer  stock  or  bonds  standing  in  the  name  of  the 
corporation,  or  to  perform  any  act  in  the  name  of  the 
corporation,  such  authority  is  not  taxable  as  power  of  at- 
torney for  the  reason  that  it  is  necessary  for  a  corpora- 
tion to  perform  its  corporate  acts  through  one  of  its 
officers.  If,  however,  a  person  other  than  an  officer  of  the 
corporation  acting  in  his  official  capacity  is  given  this 
authority,  the  power  of  attorney  so  granted  would  re- 
quire a  twenty-five  cent  stamp.  A  general  power  of 
attorney  granted  by  a  Board  of  Directors  to  a  person 
other  than  an  officer  of  a  corporation  acting  in  his  official 
capacity  for  the  purpose  of  representing  the  corporation 
in  transactions  of  a  like  kind  and  nature,  such  as  convey- 
ing land  or  acknowledging  deeds,  is  considered  by  the 
treasury  department  as  specific  authority  for  each  in- 
dividual transaction,  and  a  revenue  stamp  is  required  on 
each  instrument  containing  the  power  of  attorney.84 

Judgment  Notes.  Where  judgment  notes  contain  a 
clause  authorizing  any  attorney  of  law  to  confess  judg- 
ment in  the  favor  of  the  holder  of  the  note,  such  author- 
ization is  held  not  taxable  as  a  power  of  attorney.  The 
instrument  is  held  to  be  a  warrant  of  attorney  instead  of 
power  of  attorney.85 

Power  of  Attorney  Executed  in  Foreign  Country. 
A  power  of  attorney  executed  by  a  person  residing  in  a 
foreign  country  to  a  person  in  this  country  is  taxable,  as 

83-  T.  D.  2085,  2134. 

84  T.  D.  2134. 

86  Treat  v.  Tolman,  113  Fed.  892.     T.  D.  2081. 


STAMP   TAX  827 

the  instrument  is  not  operative  and  effective  until  ac- 
cepted by  the  person  to  whom  the  power  is  granted ;  and, 
for  the  same  reason,  a  power  of  attorney  executed  by  a 
person  residing  in  this  country  to  a  person  in  a  foreign 
country  is  not  taxable.86 

When  Stamp  Affixed.  The  tax  on  a  power  of  attor- 
ney is  due  when  the  instrument  is  executed  and  is  made 
valid  by  acceptance,  and  not  when  the  power  is  exer- 
cised.87 A  power  of  attorney  containing  a  power  of  sub- 
stitution requires  only  one  twenty-five  cent  stamp.88 
A  certified  copy  of  a  power  of  attorney,  such  as  is  required 
to  be  filed  on  cards  in  the  executive  departments  of  the 
Government  by  various  insurance  and  bonding  compa- 
nies, is  not  taxable.89 

Produce,  Sales  of,  on  Exchange.  The  tax  is  imposed 
upon  (a)  sales  of,  (b)  agreements  of  sale,  and  (c)  agree- 
ments to  sell  for  future  delivery  90  any  products  or  mer- 
chandise at  any  Exchange  or  Board  of  Trade,  or  other 
similar  place.  So-called  transferred  or  scratch  sales 
are  expressly  included  by  the  statute.  No  bill,  memor- 
andum, agreement  or  other  evidence  of  a  sale,  or  agree- 
ment  of  sale,  or  agreement  to  sell,  in  case  of  cash  sales 
of  products  or  merchandise  for  immediate  or  prompt  de- 
livery which  in  good  faith  are  actually  intended  to  be 
delivered  are  subject  to  this  tax.  When  the  seller  of 
commodities  subject  to  this  tax  has  paid  the  tax,  he  may 

86  T.  D.  2134. 

87  T.  D.  2134. 

88  T.  D.  2134. 

89  T.  D.  2134. 

90  The  Act  of  October  22,  1914,  provided  for  a  tax  on  agree- 
ments either  for  present  or  for  future  delivery  but  made  an  ex- 
press  exemption  to  cover  cases  where  products  or  merchandise 
were  actually  delivered  at  the  time  of  sale  or  were  in  vessel, 
boat  or  car  and  actually  in  the  course  of  transportation. 


828  HOLMES   INCOME   TAX   SUPPLEMENT 

transfer  his  contracts  to  a  clearing  house  without  paying 
a  tax  on  such  transfer  if  the  transfer  does  not  vest  any 
beneficial  interest  in  such  clearing  house  association,  but 
is  made  for  the  sole  purpose  of  enabling  the  clearing 
house  association  to  adjust  and  balance  the  accounts  of 
its  members  on  their  several  contracts.  The  rate  is  as 
follows :  Two  cents  for  each  one  hundred  dollars  or  frac- 
tion thereof  in  value  of  the  merchandise  covered  by  the 
sale  or  agreement  of  sale  or  agreement  to  sell.91 

Immediate  or  Prompt  Delivery.  Cash  sales  of  prod- 
ucts or  merchandise  for  immediate  or  prompt  delivery 
which  in  good  faith  are  actually  intended  to  be  delivered 
are  not  taxable.  "Immediate  or  prompt  delivery"  is 
held  to  mean  delivery  at  once  or  as  soon  as  practicable, 
and  in  any  event  within  twenty  days  from  the  date  of 
sale  or  agreement.  Every  sale  or  agreement  not  evi- 
denced by  a  memorandum  or  contract  expressly  requir- 
ing immediate  or  prompt  delivery  within  the  above  def- 
ition  is  deemed  to  be  for  future  delivery.  In  all  cases 
in  which  the  Commissioner  is  not  satisfied  from  the  evi- 
dence submitted  to  him  that  the  transaction  was  in  good 
faith  intended  to  be  followed  by  immediate  or  prompt 
delivery,  within  the  above  definition,  the  seller  will  be 
required  to  pay  the  tax  as  on  a  sale  for  future  delivery.92 

Exchange  or  Board  of  Trade.  The  law  taxes  only 
sales  on  any  exchange  or  board  of  trade  or  other  similar 
place.  The  word  "exchange"  is  held  to  mean  every 
agency,  auction  place,  or  other  meeting  place  at  which 
produce  or  merchandise  for  future  delivery  is  publicly 
bought,  sold,  bid  for,  offered,  or  exchanged,  or  contracts 
for  such  future  delivery  are  made,  either  between  the 

91  The  Act  of  October  3,  1917,  Title  8,  Sched.  A.,  Subd.  5. 

92  -Reg.  40,  Part  2,  Art.  4. 


STAMP    TAX  829 

members  or  patrons  of  such  exchange,  or  as  between  mem- 
bers and  Don-members,  patrons,  and  the  public.  It  in- 
cludes all  incorporated  and  unincorporated  associations 
of  individuals,  partnerships,  and  corporations  engaged 
in  the  business  of  publicly  selling,  buying,  or  exchanging 
products  or  merchandise  for  future  delivery.93 

Transfers  to  Clearing  House.  Sellers  of  products, 
merchandise  or  commodities  having  paid  the  tax  provided 
by  law  may  transfer  such  contracts  to  a  clearing  house 
association,  and  such  transfer  is  not  taxable  within  the 
provisions  of  the  Act,  provided  that  the  transfer  does  not 
vest  any  beneficial  interest  in  the  clearing  house  asso- 
ciation and  is  made  for  the  sole  purpose  of  enabling  such 
clearing  house  association  to  adjust  and  balance  the  ac- 
counts of  its  members  on  their  several  contracts.  A 
clearing  bouse  is  defined  to  be  any  incorporated  or  un- 
incorporated association  carried  ©n  for  the  purpose  of 
clearing,  settling,  and  adjusting  transactions  in  pur- 
cbasing,  selling,  receiving,  or  delivering  products  or 
merchandise,  whether  such  clearing  house  be  a  part  or 
department  of  an  exchange  or  an  independent  body.94 

Registration  and  Records.  All  persons  engaged  in 
the  business  of  making  contracts  of  sale  on  any  ex- 
change and  all  clearing  bouses  and  members  of  ex- 
changes  are  required  to  register  and  keep  records  of 
transactions  subject  to  the  tax.  The  rulings  in  this  re- 
spect are  referred  to  more  fully  in  a  subsequent  part  of 
this  chapter. 

Promissory  Notes.  The  law  provides  that  the  tax  on 
promissory  notes,  and  for  each  renewal  of  the  same,  for 
a  sum  not  exceeding  one  hundred   dollars  shall   be  two 

88 Keg.  40,  Tart   2,  Art.  1. 

94  R,vur.    ID,    | 'art    2,   Arts.    1    to  4. 


830  HOLMES   INCOME   TAX   SUPPLEMENT 

cents;  and  for  each  additional  one  hundred  dollars  or 
fractional  part  thereof  two  cents.  The  only  exception 
in  the  statute  relates  to  bank-notes  issued  for  circulation. 
The  law  also  provides  that  drafts  or  checks  payable  other- 
wise than  at  sight  or  on  demand  shall  be  taxed  at  the 
same  rate. 

Checks  or  Drafts  Payable  Other  wise  than  at 
Sight  or  on  Demand.  Under  the  former  law  it  was  held 
that  in  view  of  the  decision  made  by  the  Supreme  Court 
of  the  United  States  in  the  case  of  the  United  States  v. 
Isham,  17  Wall.  496,  that  "The  liability  of  an  instrument 
to  a  stamp  duty,  as  well  as  the  amount  of  such  duty,  is 
determined  by  the  form  and  face  of  the  instrument,  and 
cannot  be  effected  by  proof  of  facts  outside  of  the  instru- 
ment itself,"  drafts,  acceptances,  overdrafts  and 
postdated  checks  were  not  taxable  as  promissory  notes, 
even  though  they  were  used  in  such  a  way  as  to  per- 
form some  of  the  functions  of  a  promissory  note.95  It 
is  no  doubt  in  view  of  this  decision  that  drafts  and 
checks  payable  otherwise  than  at  sight  or  on  demand 
were  expressly  included  in  the  present  law  in  the  same 
category  as  promissory  notes. 

Definition  of  Promissory  Notes.  Whether  or  not  an 
instrument  is  taxable  as  a  promissory  note  depends  upon 
its  form  and  not  upon  its  use.  Thus,  a  receipt  given  by 
a  loan  company  for  property  received  as  security  for  a 
debt  is  not  a  promissory  note ;  but,  if  in  the  receipt  there 
is  included  a  promise  to  pay  a  certain  sum  of  money  at  a 
specified  time,  with  interest,  for  value  received,  such  a 
provision  in  the  opinion  of  the  Treasury  Department  is 
a  valid  promissory  note,  upon  which  the  maker  would  be 
liable  in  a  suit  at  law,  and  is  taxable.96    Policy  loan  and 

95  T.  D.  2170. 

96  T.  D.  2170. 


STAMP    TAX  831 

premium  extension  agreements  are  not  promissory  notes 
as  contemplated  by  the  law  and  therefore  are  not  liable  to 
stamp  tax.97  In  the  case  of  contracts  for  the  purchase 
of  pianos,  machinery,  and  other  merchandise,  there  is 
sometimes  included,  among  other  conditions  and  provi- 
sions, an  agreement  to  pay  the  vendor  a  stipulated  sum 
of  money  at  a  certain  time,  with  interest,  for  value  re- 
ceived. If  this  agreement  is  in  form  and  effect  a  good 
and  valid  promissory  note,  upon  which  the  maker  would 
be  liable  in  a  suit  at  law,  such  promissory  note  is  tax- 
able. If,  however,  the  contract  merely  provides  for  the 
payment  of  the  purchase  price  in  installments  and  enum- 
erates the  dates  upon  which  such  payments  are  due,  stat- 
ing, as  many  of  the  contracts  do,  that  in  default  of  pay- 
ment the  vendor  may  take  the  property,  such  agreement 
is  not  a  promissory  note.98  It  is  often  difficult  to  make 
a  distinction  between  promissory  notes  and  bonds  of  in- 
debtedness. It  has  been  held,  however,  that  the  fact  that 
a  promissory  note  is  under  seal  does  not  make  it  tax- 
able as  a  bond.99  Nor  does  the  fact  that  a  note  may  be 
secured  by  a  mortgage  or  issued  under  a  deed  of  trust 
necessarily  make  it  taxable  as  a  bond.  The  chief  dis- 
tinction between  bonds  and  promissory  notes  seems  to 
be  the  time  for  which  the  note  or  bond  is  to  run.  Prom- 
ises to  pay  within  a  comparatively  short  period  of  time, 
such  as  one  year  or  two  years,  are  usually  held  to  be 
taxable  as  notes  while  promises  to  pay  at  the  end  of  a 
longer  period  are  considered  more  in  the  nature  of  bonds 
or  certificates  of  indebtedness.  Coupon  or  interest  notes 
attached   to  and   forming  part  of  a  bond  or  principal 

97  T.  D.  2599. 

98  T.  D.  2170. 

99T.D.  21815  (Act  of  June  13,  1898). 


832  HOLMES   INCOME   TAX   SUPPLEMENT 

note  are  not  subject  to  tax  as  promissory  notes  even 
though  they  are  in  the  form  of  promissory  notes.100 

Notes  Issued  by  Foreign  Governments.  The  law 
provides  that  no  bond,  note  or  other  instrument 
issued  by  the  United  States  or  by  any  foreign  government 
or  by  any  state,  territory,  or  the  District  of  Columbia  or 
local  subdivision  thereof,  or  municipal  or  other  corpora- 
tion exercising  the  taxing  power,  when  issued  in  the  ex- 
ercise of  a  strictly  governmental,  taxing,  or  municipal 
function  shall  be  subject  to  tax.101 

Notes  Drawn  in  Foreign  Countries.  A  promissory 
note  drawn  in  a  foreign  country,  and  placed  in  the  mails 
in  that  country  for  delivery  to  a  person  residing  in  the 
United  States,  is  not  required  to  be  stamped.  Deliv- 
ery of  commercial  paper  is  necessary  for  its  completion 
and  by  the  weight  of  authority  such  an  instrument  is 
delivered  when  placed  in  the  mails.  The  laws  of  the  for- 
eign country,  therefore,  would  determine  the  validity  of 
the  contract,  even  if  the  instrument  is  made  payable  in 
the  United  States.  On  the  other  hand,  a  promissory  note 
drawn  in  the  United  States  and  placed  in  the  mails  for 
delivery  to  a  person  residing  in  a  foreign  country  is  tax- 
able, for  the  reason  above  stated.102 

Renewal  op  Notes.  A  renewal  after  the  incidence  of 
the  tax  of  an  instrument  issued  prior  thereto  is  subject 
to  tax.  A  written  agreement,  either  attached  or  de- 
tached to  a  promissory  note  or  in  the  form  of  an  en- 
dorsement on  the  note,  such  as  "renewed"  or  "ex- 
tended" to  a  certain  date,  evidencing  payment  and  ac- 
ceptance of  interest  in  advance  to  a  time  certain,  sub- 

100  T.  T).  2101.  Kenosha  v.  Lamson,  9  Wall.  477;  Lexington  v. 
Butler,  14  Wall.  282. 

101  Act  of  October  3,  1917,  Section  801. 

102  T.  D.  2170. 


STAMP    TAX  833 

sequenl  to  maturity,  constil  iites  a  renewal  of  the  note  and 

is  subject  to  tax  as  such.  On  the  other  hand,  part  pay- 
ment of  a  noie  after  it  becomes  due,  or  payment  of  ac- 
crued interesl  after  maturity,  the  note  being  allowed  to 
run  and  the  holder  neither  Losing  or  postponing  his  right 
of  action,  is  merely  in  the  nature  of  a  forebearance  and 
is  not  taxable  as  a  renewal.103  A  contract  or  agreement 
extending  either  a  chattel  or  real  estate  mortgage  is  not 
taxable,  but  if  such  extension  effects  the  renewal  of  prom- 
issory notes,  either  embodied  in  the  mortgage  or  given 
in  connection  with  the  mortgage,  the  renewal  of  such 
notes  is  taxable.104 

Transfer  op  Notes.  No  stamp  is  required  upon  the 
transfer  by  indorsement  of  promissory  notes. 

Who  Affixes  Stamp.  The  person  who  makes  or  issues 
a  promissory  note  is  required  by  the  law  to  place  the 
stamp  upon  the  same  and  cancel  it.  If  he  does  not  do  so 
tht'  holder  or  owner  may  affix  and  cancel  the  stamp  as 
agent  for  the  maker. 

Proxies.  The  tax  is  imposed  on  every  proxy  for  vot- 
ing at  any  election  of  officers  or  for  voting  at  any  meet- 
ing for  the  transaction  of  business  of  any  incorporated 
company  or  association.  Under  the  former  law  the  tax 
was  only  on  proxies  for  voting  at  any  election  of  offi- 
cers. The  present  law  taxes  all  proxies  used  at  meetings 
for  the  transaction  of  business.  The  tax  is  ten  cents  on 
each  proxy.  Proxies  for  voting  at  any  election  of  officers, 
or  meeting  for  the  transaction  of  business  of  any  relig- 
ious, educational,  charitable,  fraternal,  or  literary  socie- 
ties, or  public  cemeteries,  are  expressly  exempt. 

Proxies  Signed  by  Two  ok  More  Stockholders.    A 

103  T.  D.  2265. 

104  T.  D.  2170. 


834  HOLMES   INCOME   TAX   SUPPLEMENT 

ten-cent  stamp  is  required  for  each  signature  upon  a 
power  of  attorney  or  proxy  for  use  in  voting  at  the  elec- 
tion of  officers  of  an  incorporated  company.105 

When  Stamped.  It  seems  that  the  proxy  need  not 
be  stamped  until  it  is  accepted  by  the  person  to  whom  it 
is  issued  but  must  be  stamped  before  it  can  be  used. 
Thus,  it  has  been  held  that  a  power  of  attorney  or  proxy 
executed  by  a  person  residing  in  a  foreign  country  to  a 
person  residing  in  this  country  is  taxable,  as  the  instru- 
ment is  not  operative  and  effective  until  accepted  by  the 
person  in  this  country  to  whom  it  is  issued.  Powers  of 
attorney  and  proxies  executed  by  a  person  residing  in 
the  United  States  to  a  person  in  a  foreign  country  are 
not  taxable.106  Powers  of  attorney  or  proxies  executed 
and  accepted  before  the  incidence  of  the  tax  are  not 
taxable,  even  though  used  after  the  incidence  of  the 
tax.107 

Who  May  Affix  Stamps.  Where  proxies  are  sent  out 
by  corporations  to  be  executed  and  returned  to  the  cor- 
poration or  to  the  person  named  in  the  proxy  such  prox- 
ies may  be  stamped  after  execution  and  delivered  by  the 
person  receiving  the  same  as  the  agent  of  the  person 
executing  the  proxy.108  The  stamp  may  be  affixed  and 
cancelled  either  by  the  party  who  executes  the  proxy  or 
by  the  party  to  whom  the  proxy  is  given.109  Where  the 
stamp  is  affixed  by  an  officer  or  employee  of  the  corpora- 
tion it  is  sufficient  to  cancel  the  stamp  by  writing  thereon 
the  initials  of  the  officer  or  employee  or  the  initials  of 

105  t.  D.  2129. 

106  T.  D.  2129. 

107  T.  D.  2129. 

108  T.  D.  2067. 

109  T.  D.  2129. 


STAMP    TAX  835 

the  corporation   and  by  incision  or  perforation  if  the 
stamp  has  a  value  of  ten  cents  or  more.110 

Rights  to  Subscribe  for  Stock.  The  tax  on  transfers 
of  stock  is  imposed  upon  sales  or  transfers  of  legal  title 
to  shares  or  certificates  of  stock  in  any  association,  com- 
pany, or  corporation.  It  was  held  under  the  former  law 
that  a  rertificate  of  right  to  subscribe  for  additional 
stock  issued  to  the  stockholders  of  a  corporation  was  not 
required  to  be  stamped  upon  transfer  from  the  stock- 
holder to  a  third  party.111  Under  the  present  law  it  has 
been  ruled  that  "rights"  shall  be  treated  as  shares  or 
certificates  of  stock,llla  but  this  construction  does  not 
seem  to  be  supported  by  the  language  of  the  statute. 

Security  Agreements  and  Application  for  Loans.  Nei- 
ther  a  security  agreement  signed  by  a  prospective  bor- 
rower of  a  bank,  empowering  the  bank  to  apply  any 
securities,  money,  or  other  property  of  the  prospective 
borrower  in  the  hands  of  the  bank  to  satisffy  the  debt 
of  the  borrower  to  the  bank,  nor  the  form  of  application 
for  the  loan,  is  included  in  the  classes  of  instruments 
made  subject  to  stamp  tax  under  Schedule  A  of  Section 
807,  and  neither  is  therefore  subject  to  such  tax.112 

Shares  Without  Par  Value.  Under  the  Act  of  October 
22,  1014.  shares  without  par  value  were  not  subject  to 
tax  either  on  issue  or  transfer  but  under  the  present 
law  such  shares  are  taxable.  See  Capital  Stock,  Issue 
and  Capital  Stock,  Sales  and  Transfers,  above. 

Stock  Certificates.  See  Capital  Stock,  Issue  and  Cap- 
ital Stock,  Sales  and  Transfers,  above. 

110  Letter   from    Treasury  Department   dated  January   8,   1915. 

111  letter  from  Treasury  Departemnt  dated  MaTch  12,  1915. 
Ula  Keg.  No.  40,  Part  1,  Art.  1. 

112  T.  D.  2599. 

F.  TvTaxSupp.— 12 


836  HOLMES   INCOME   TAX   SUPPLEMENT 

Transfers  of  Stock.  See  Capital  Stock,  Issue  and  Cap- 
ital Stock,  Sales  and  Transfers,  above. 

Voting  Trust  Certificates.  Voting  trust  certificates 
are  held  to  be  taxable  on  transfer  as  stock  certificates. 
See  Capital  Stock,  Sales  and  Transfers,  above. 

Cancellation  of  Documentary  Stamps.  Stamps  are 
cancelled  by  the  person  using  or  affixing  the  stamp, 
by  writing  or  stamping  thereon  in  ink  his  initials  and  the 
day,  month,  and  year  on  which  the  stamp  is  used  or 
affixed  or  by  cutting  or  cancelling  the  stamp  with  a 
machine  or  punch  which  affixes  his  initials  and  date  as 
aforesaid  and  so  defaces  the  stamp  as  to  render  it  unfit 
for  reuse.  In  addition,  stamps  o'f  the  value  of  ten  cents 
or  more  are  required  to  be  cancelled  by  three  parallel 
incisions  made  by  some  sharp  instrument  lengthwise 
through  the  stamp  after  the  stamp  has  been  attached 
to  the  instrument.  These  parallel  incisions,  however, 
are  not  required  where  the  cancellation  is  made  by  per- 
foration. The  cancellation  by  either  method  should  not 
so  deface  the  stamp  as  to  prevent  its  denomination  and 
genuineness  from  being  readily  determined.113  When 
a  perforating  machine  is  used  it  is  not  necessary  that 
the  perforation  should  outline  the  initials  and  date,  but 
it  is  sufficient  if  after  the  initials  and  date  have  been 
written  on  the  stamp,  several  perforations,  sufficient  to 
prevent  washing  and  resale  of  the  stamp  are  made  with 
an  ordinary  hand  punch  before  fixing  the  stamp  to  the 
document.114  Where  the  initials  of  a  person,  firm  or 
corporation  have  been  perforated  on  the  stamps  before 
being  used  it  is  sufficient  when  the  stamps  are  actually 
attached  to  the  document  to  stamp  the  same  with  the 

113  Reg.  40,  Part  1,  Art.  7. 

114  T.  D.  2098. 


STAMP   TAX  837 

full  initials  and  date.  Where  the  initials  of  a  firm  or 
company  have  been  stamped  or  written  on  a  stamp  it 
is  not  required  that  the  individual  employee  affixing 
the  stamp  shall  also  place  his  own  initials  thereon.115 

Registration  of  Stockbrokers  and  Clearing-  Houses. 
Every  person,  partnership,  corporation,  exchange,  or 
clearing  house  engaged  in  whole  or  in  part  in  negotiat- 
ing, making,  or  recording  sales,  agreements  to  sell,  de- 
liveries or  transfers  of  shares  or  certificates  for  shares  of 
stock,  or  in  conducting  or  transacting  a  stock-brokerage 
business,  or  in  the  clearing,  settling,  or  adjusting  of  any 
of  the  transactions  referred  to  in  section  807,  subdivi- 
sion 4  of  the  act,  or  who  shall  be  engaged  in  the  business 
of  accepting  or  procuring  the  transmission  of  orders  for 
the  sale  or  purchase  or  transfers  of  stock  to  be  made 
or  executed  at  or  under  the  rules  or  customs  of  an  ex- 
change in  the  continental  United  States,  shall,  on  the 
first  day  of  December,  1917 — and  if  not  on  that  date 
engaged  in  business  then  within  ten  days  after  engaging 
in  business,  and  on  the  first  day  of  July  annually  there- 
after— file  in  the  office  of  the  collector  of  internal  revenue 
of  the  district  in  which  each  place  of  business  of  such 
person,  partnership,  corporation,  exchange,  or  clearing 
house  is  located,  or  with  such  other  internal-revenue  offi- 
cer as  may  be  hereafter  designated,  a  statement,  under 
oath,  setting  forth  the  full  name  or  names  of  such  per- 
son or  persons,  and  of  all  the  members  of  such  partner- 
ship conducting  or  transacting  the  business,  with  the 
post-office  address  or  addresses  of  such  person  or  per- 
sons, or  partnership,  unless  the  person  so  certifying  be 
a  corporation,  exchange,  or  clearing  house,  in  which  event 
it  shall  set  forth  its  principal  office  or  place  of  business, 

115  Letter  from  Treasury  Department  dated  December  9,  1914. 


838  HOLMES   INCOME   TAX   SUPPLEMENT 

with  the  names  and  addresses  of  its  chief  officer  and 
secretary,  accompanied  by  a  list  of  its  members  and  their 
addresses,  and  if  incorporated,  when  and  where  incor- 
porated, and  if  not  incorporated  under  what  agreement 
or  authority  it  is  conducting  such  business  or  agency. 
Such  statement  shall  also  specifically  set  forth  the  char- 
acter of  the  business  to  be  conducted,  and  shall  be  exe- 
cuted and  duly  acknowledged  by  the  person  or  persons 
so  conducting  or  intending  to  conduct  said  business,  or 
by  the  president  or  secretary  of  the  corporation  or  ex- 
change or  clearing  house.  Each  exchange  or  clearing 
house  shall  also  file  with  said  collector  or  other  designated 
internal-revenue  officer  a  copy  of  its  constitution,  char- 
ter, agreement  of  association,  by-laws,  rules  and  regula- 
tions, and  of  all  amendments  thereto,  as  the  same  may 
from  time  to  time  be  adopted,  and  the  names  and  ad- 
dresses of  new  members  as  from  time  to  time  admitted 
to  membership. 

The  said  statement  shall  further  contain  information 
as  to  whether  the  person  executing  the  same  has  been 
licensed  under  any  State  laws  or  under  any  other  pro- 
vision of  Federal  law;  and  if  so,  the  dates  and  places 
at  which  any  such  licenses  were  issued.  Such  statements 
shall  be  made  upon  forms  to  be  furnished  upon  applica- 
tion to  the  collector  of  internal  revenue.116 

Certificate  of  Registry.  Every  collector  or  other 
designated  internal-revenue  officer  shall  file  and  pre- 
serve each  statement  of  registration  made  to  him  in  ac- 
cordance with  these  regulations,  and  shall  issue  to  such 
person,  partnership,  exchange,  clearing  house,  or  cor- 
poration a  certificate  of  registry,  showing  the  date  of 
issue,  the  name  of  the  person  or  persons,  or  exchange, 
clearing  house,  or  corporation,  conducting  the  business, 

116  Reg.  No.  40,  Part  1,  Art.  2. 


STAMP    TAX  839 

the  nature  of  the  business  for  which  the  license  is 
granted,  and  the  date  of  expiration  of  said  registry, 
which  certificates  shall  be  signed  by  the  collector  or 
other  designated  internal-revenue  officer,  and  shall  be 
posted  in  some  prominent  place  in  the  office  of  said  per- 
son, partnership,  exchange,  clearing  house,  or  corpora- 
tion during  the  period  for  which  issued.  If  such  busi- 
ness is  conducted  at  more  than  one  place,  a  certificate 
shall  be  so  posted  in  each  such  place  of  business.117 

Record  of  Sales  or  Transfers  of  Stock.  All  persons 
who  are  wholly  or  partly  engaged  in  the  business  of 
buying,  selling,  or  transferring  shares  of  stock,  whether 
at  public  or  private  sale,  or  whether  or  not  they  are 
members  of  an  exchange,  including  persons  engaged  in 
transactions  known  as  ''matched,"  or  "on-order,"  or 
' '  pass-outs, ' '  or  by  any  other  name  or  term  at,  on,  or  in 
any  exchange  or  similar  place,  whether  or  not  such  trans- 
actions are  cleared,  adjusted,  or  settled  through  a  clear- 
ing house  or  directly  between  seller  and  buyer,  or  other- 
wise, shall  keep  a  record  showing — 

(a)  The  date  of  the  transaction. 

(b)  The  name  of  the  seller  or  transferor. 

(c)  The  name  of  the  purchaser  or  transferee. 

(d)  If  the  order  was  executed  on  an  exchange,  the 
name  of  the  person  who  executed  the  order. 

(e)  Whether  the  transaction  is  a  purchase  or  sale. 

(f)  The  name  of  the  corporation  the  stock  of  which  is 
the  subject  of  the  sale  and  the  number  of  shares  thereof. 

(g)  Whether  the  stock  was  listed  on  an  exchange. 
ili)  Whether  the  stock  was  cleared  through  a  clearing 

house. 

(i)   The  face  or  par  value  of  the  stock. 

117  Keg.  No.  40,  Part  1,  Art.  3. 


840  nOLMES   INCOME    TAX   SUPPLEMENT 

(j)  The  price  of  the  stock  if  there  is  no  face  or  par 
value. 

(k)   Whether  the  shares  were  borrowed  or  loaned. 

(1)  Whether  the  transaction  was  "matched,"  "on- 
order,"  a  "pass-out,"  or  a  "scratched  sale."  or  any- 
other  kind  of  sale  or  purchase. 

(m)   The  amount  of  tax  paid. 

(n)  The  identifying  number  of  the  bill  or  memoran- 
dum of  sale,  as  required  by  article  6  of  these  regulations. 

(o)  The  origin  of  the  order,  whether  domestic  (refer- 
ring to  the  Continental  United  States),  or  foreign  (re- 
ferring to  other  countries). 

Persons  using  such  forms  may  incorporate  therein  ad- 
ditional columns  that  would  be  of  use  to  them,  such  col- 
umns to  be  placed  after  the  columns  containing  the  in- 
formation herein  required,  so  as  not  to  interfere  with 
the  columns  and  headings  hereby  prescribed.  These  rec- 
ords must  be  in  book  form,  and  all  entries  therein  must 
be  legibly  written  in  ink  and  the  records  kept  for  a 
period  of  at  least  two  years.  Such  record  forms  will  not 
be  supplied  by  the  department.118 

Returns  of  Persons  Making  Sales  of  Stock.  All  per- 
sons who  are  wholly  or  partly  engaged  in  the  business  of 
buying,  selling,  or  transferring  shares  of  stock  at,  in, 
or  on  an  exchange,  whether  or  not  such  sales,  purchases, 
or  transfers  shall  be  made,  cleared,  settled,  or  adjusted 
through  a  clearing  house;  shall  on  or  before  the  fifteenth 
day  of  each  month,  and  at  any  other  time  or  times  that 
may  be  designated  by  the  Commissioner  of  Internal 
Revenue,  render  under  oath  a  true  return  of  all  such 

113  Reg.  No.  40,  Part  1,  Art.  8.  The  regulation  sets  forth  in 
full  the  form  of  record  required  for  clearing  house  transactions 
and  ex-clearing  house  transactions.  Books  containing  such  forms 
are  now  supplied  by  the  leading  stationers  in  the  large  cities. 


STAMP   TAX  841 

sales  and  purchases  to  said  commissioner  for  the  pre- 
ceding month  or  for  any  other  period  designated  by  the 
commissioner,  containing  in  detail  the  following  data 
and  information: 

(a)   The  month  for  which  the  return  is  made. 
(h)    The  name  and  address  of  the  person,  partnership, 
corporation,  or  association  making  the  return. 

(c)  The  number  of  shares  of  stock  sold  and  purchased 
on  such  exchange  and  cleared  by  its  clearing  agency  or 
association. 

(d)  The  number  of  shares  of  stock  sold  and  purchased 
mi  such  exchange  that  were  not  cleared  by  its  clearing 
agency  or  association. 

(e)  In  respect  of  shares  having  a  face  (or  par)  value : 

(1)  The  aggregate  face  value  of  all  shares,  not 
including  any  fraction  of  less  than  $100  of  face 
value  involved  in  any  transaction. 

(2)  The  number  of  fractions  of  less  than  $100 
of  face  value  involved  in  all  transactions. 

(f )  In  respect  of  shares  having  no  face  (or  par)  value : 

( 1 )  As  to  such  shares  of  an  actual  value  in  ex- 
cess of  $100  per  share. 

A.  The  aggregate  actual  value  of  all  shares,  not 
including  any  fraction  of  less  than  $100  involved  in 
any  transaction. 

B.  The  number  of  fractions  of  less  than  $100  in- 
volved in  all  transactions  in  such  shares. 

(2)  As  to  such  shares  of  an  actual  value  of  $100 
or  less  per  share — 

A.     The  total  oumber  of  such  shares. 

(g)  As  to  shares  purchased,  the  same  information 
and  detail  required  for  shares  sold,  transferred,  and  de- 
livered required  under  (e)  and  (f)  for  shares  sold,  trans- 
ferred, or  delivered. 


842  HOLMES   INCOME   TAX   SUPPLEMENT 

(h)   The  number  of  shares  of  stock  borrowed. 

(i)   The  number  of  shares  of  stock  loaned. 

(j)   The  number  of  shares  of  loaned  stock  returned. 

(k)   The  number  of  shares  of  borrowed  stock  returned. 

(1)  The  amount  of  tax  paid. 

(m)  The  amount  in  dollars  of  stamps  purchased  dur- 
ing the  month. 

(n)  The  amount  in  dollars  of  stamps  on  hand  on  the 
last  day  of  the  month  for  which  return  is  being  made. 

Such  returns  shall  be  made  upon  forms  furnished  upon 
application  by  the  internal  revenue  collector  or  other 
designated  officer. 

The  Commissioner  of  Internal  Revenue  may,  from  time 
to  time,  require  any  person  wholly  or  partly  engaged  in 
the  business  of  buying,  selling,  or  transferring  shares  of 
stock,  whether  at  public  or  private  sale,  and  whether  or 
not  such  sale  shall  be  made  on  an  exchange  or  cleared, 
settled,  or  adjusted  through  a  clearing  house  to  render 
under  oath  returns  of  all  such  transactions  upon  forms 
prescribed  by  him.119 

Returns  by  Clearing  Houses.  Every  clearing  house 
or  committee  or  body  through  or  by  which  clearing  is 
done  shall,  on  or  before  the  fifteenth  day  of  each  month, 
and  at  any  other  time  designated  by  the  Commissioner 
of  Internal  Revenue,  render  in  writing  under  oath  to 
the  Commissioner  of  Internal  Revenue  a  return  for  the 
preceding  month,  or  for  any  other  period  that  may  be 
designated  by  the  commissioner,  of  all  facts  in  their  pos- 
session relating  to  any  and  all  such  transactions,  and 
showing  in  detail : 

(a)  The  month  for  which  return  is  made; 

(b)  The  name  and  address  of  the  clearing  house  or 

119  Eeg.  No.  40,  Part  1,  Art.  9. 


STAMP    TAX  843 

similar  business,  agency,  or  institution  making  the  re- 
turn ;  and 

(c)  The  number  of  shares  of  stock  directed  to  be  re- 
ceived and  the  number  of  shares  of  stock  directed  to  be 
delivered  and  cleared,  settled,  or  adjusted  for  each  mem- 
ber during  the  month  or  period  for  which  the  return  is 
made. 

Such  return  shall  be  made  upon  the  forms  to  be  fur- 
nished upon  application  by  the  collector  of  internal  rev- 
1'iiue  or  other  designated  officer. 

If  any  person  who  negotiates  sales  or  transfer  of  stock 
on  a  stock  exchange,  shall  appoint  in  writing  the  clear- 
ing house  for  such  exchange  upon  which  such  sale  or 
transfers  are  made,  if  any,  his  agent  for  the  purposes 
hereinafter  indicated,  such  clearing  house  being  approved 
by  the  Commissioner  of  Internal  Revenue,  and  shall 
make  a  written  return,  statement  or  sheet,  to  such  clear- 
ing house  containing  a  full  disclosure  on  each  business 
day  of  all  such  transactions,  both  such  as  are  clearable 
and  non-clearable,  of  the  preceding  day  in  shares  of 
stock  that  are  listed  or  permitted  to  be  dealt  in  by  such 
member  on  such  exchange,  also  which  if  any  of  such 
stocks  arc  loaned  or  borrowed,  then  in  that  event  such 
return,  statement,  or  sheet  delivered  to  the  clearing  house 
shall  be  deemed  to  be  the  bill,  or  memorandum  of  sale, 
or  agreement  to  sell,  required  under  section  807,  sub- 
division 4,  of  the  act  approved  October  3,  1917,  and 
Mich  clearing  house  is  hereby  authorized  to  affix  to  such 
return,  statement,  or  sheet  the  amount  of  stamps  required 
for  each  sale  or  agreement  to  sell  or  memorandum  of  sale 
for  delivery  or  transfer  of  such  stock  indicated  thereon, 
and  to  cancel  the  stamp  so  affixed.  The  affixing  and  can- 
cellation of  such  stamps  by  the  clearing  house  shall  be 
held  to  be  that  of  the  person  making  such  sale  or  agree- 


844  HOLMES   INCOME   TAX   SUPPLEMENT 

ment  to  sell,  or  memorandum  of  sale,  for  delivery  or 
transfer  of  such  stock.  The  returns,  statements,  or 
sheets  made  to  the  clearing  house  shall  in  respect  of  each 
sale  show  the  date  thereof,  the  name  of  the  seller,  the 
name  of  the  buyer,  the  amount  of  the  sale,  and  the  name 
of  the  stock,  certificates,  voting  shares,  or  other  things 
traded  in,  but  a  return  for  more  than  one  sale  may  be 
upon  the  same  return,  statement,  or  sheet,  and  no  set- 
tlement of  differences  or  other  dealings  between  members 
shall  be  permitted  that  will  interfere  with  the  full  dis- 
closure of  the  whole  transaction. 

Said  clearing  house  shall'  preserve  the  returns,  state- 
ments, or  sheets  so  made  and  stamped  for  at  least  two 
years. 

But  such  return,  statement,  or  sheet  to  the  clearing 
house  shall  not  relieve  the  person  from  making  the 
monthly  return  required  by  these  regulations. 

Wherever  any  clearing  house  association  or  similar 
body  carries  upon  its  sheets  or  records  information  or 
reports  of  transactions  showing  the  transfer  by  one  of 
its  members  of  an  account  of  a  customer  without  change 
of  ownership  of  the  securities  of  the  customer,  there 
shall  be  kept  by  the  members  of  such  clearing  house  or 
body  concerned  in  such  transaction,  a  record  showing 
the  particulars  of  such  transactions.120 

Substitute  Returns — Agents.  If  any  person  or  clear- 
ing house  required  to  male  any  return  by  law,  or  the 
regulations  thereunder,  shall  fail  or  refuse  to  make  such 
return  within  the  time  prescribed,  such  return  may  be 
made  by  an  internal  revenue  officer,  upon  inspection  of 
the  books  and  papers  of  the  person  or  clearing  house 
required  to  make  such  returns;  but  the  making  of  such 

120  Reg.  No.  40,  Part  1,  Art.  10. 


STAMP    TAX  845 

return  by  an  internal  revenue  officer  shall  not  relieve 
the  person  or  clearing  house  in  default  from  any  penalty 
incurred  by  reason  of  the  failure  to  make  such  return. 

Any  officer  designated  by  the  Commissioner  of  Inter- 
nal Revenue  shall  have  authority  to  examine  the  books, 
papers,  and  records  kept  pursuant  to  these  regulations 
and  may  require  the  production  of  any  other  books,  rec- 
ords, papers,  or  statements  of  account,  necessary  to  de- 
termine any  liability  to  the  tax  imposed  by  the  act,  or 
to  the  observance  of  the  provisions  of  the  regulations 
made  in  accordance  therewith.121 

Sale  of  Stamps.  No  person  other  than  a  collector  of 
internal  revenue,  or  duly  authorized  deputy  collector 
of  internal  revenue,  an  Assistant  Treasurer,  or  other 
United  States  designated  depositary  shall  sell  or  expose 
for  sale,  give  away,  traffic  in,  trade,  barter,  lend,  borrow, 
or  exchange  any  stamp,  issued  pursuant  to  these  regu- 
lations. No  person  shall  buy  or  receive  any  such  stamps 
or  have  the  same  in  his  possession  or  under  his  control, 
unless  such  stamps  have  been  purchased  directly  from 
the  collector  of  internal  revenue,  Assistant  Treasurer, 
or  other  United  States  designated  depositary,  in  the  dis- 
trict in  which  the  stamps  are  to  be  used. 

All  requisitions  for  stamps  to  be  used  under  these  reg- 
ulations, shall  be  made  in  writing,  in  ink,  on  a  form  pre- 
scribed by  the  Commissioner  of  Internal  Revenue,  to 
the  collector  of  internal  revenue,  or  to  an  Assistant 
Treasurer,  or  other  designated  depositary,  in  the  inter- 
nal-revenue district  in  which  the  stamps  are  to  be  used, 
giving  the  date  thereof,  the  number  and  denomination 
of  stamps  applied  for,  and  the  name  and  address  of  the 
purchaser,  and  shall  be  signed  in  ink  by  the  person  re- 
ceiving the  stamps. 

121  Reg.  No.  40,  Part  1,  Art.  11. 


846  HOLMES   INCOME   TAX   SUPPLEMENT 

The  collector  of  internal  revenue  to  whom  such  re- 
quests are  made  shall  keep  a  record  thereof,  and  shall 
keep  the  requisitions  separate  and  apart  from  all  other 
requisitions  for  stamps,  and  preserve  them  in  his  office 
for  a  period  of  two  years.  Any  Assistant  Treasurer  or 
designated  depositary  of  the  United  States,  receiving 
requisitions  for  such  stamps  shall  keep  a  record  of  each 
such  requisition  and  at  the  end  of  each  month  shall  file 
such  requisitions  with  his  monthly  report  to  the  collector 
of  internal  revenue  of  the  district  in  which  said  Assist- 
ant Treasurer  or  other  designated  depositary  is  located. 

The  stamps  to  he  used  under  these  regulations  shall  be 
of  such  kind  and  color  as  are  prescribed  by  the  Commis- 
sioner of  Internal  Revenue.122 

Registration  of  Dealers  in  Futures.  Every  person  en- 
engaged  in  whole  or  in  part  in  making  contracts  of  sale 
of  any  product  or  merchandise  or  commodity  at,  on,  or 
in,  or  under  the  rules  or  customs  of  any  exchange  for 
future  delivery  or  engaged  in  the  business  of  accepting 
or  procuring  the  transmission  of  such  contracts  of  sale, 
to  be  executed  on  any  exchange,  and  every  exchange  and 
every  clearing  house  shall,  on  the  first  day  of  December, 
1917,  and  if  not  on  that  date  engaged  in  business,  then 
within  ten  days  after  engaging  in  business,  and  on  the 
first  day  of  July  annually  thereafter  file  in  the  office  of 
the  collector  of  internal  revenue  of  the  district  in  which 
each  place  of  business  of  such  person,  exchange,  or  clear- 
ing house  is  located,  or  with  such  other  internal-revenue 
officer  as  may  be  hereafter  designated,  a  statement  under 
oath  setting  forth  the  full  name  of  such  person,  if  an  in- 
dividual, and  if  a  partnership  the  full  names  of  all  the 
members  of  such  partnership,  with  the  post-office  address 

122  Reg.  No.  40,  Part  1,  Art.  12. 


STAMP    TAX  S  \  1 

of  the  individual  or  partnership;  and  if  the  person  filing 
such  statement  be  a  corporation  or  association  it  shall 
set  forth  its  principal  office  or  place  of  business  with  the 
names  and  addresses  of  its  chief  officer  and  its  secretary, 
accompanied  by  a  list  of  its  members  and  their  addresses, 
and  if  incorporated  when  and  where  incorporated,  and 
if  unincorporated,  under  what  agreement  or  authority 
it  is  conducting  business,  together  with  a  copy  of  such 
agreement.  Statements  hied  in  behalf  of  any  corpora- 
tion, association,  exchange,  or  clearing  house  shall  be 
r\i tii ted  and  duly  acknowledge  by  the  president  or  sec- 
retary thereof.  Every  statement  filed  by  an  exchange 
or  clearing  house  shall  specifically  set  forth  the  character 
of  the  business  conducted  or  intended  to  be  conducted. 
Each  exchange  and  clearing  house  shall  also  file  with  the 
said  collector  or  other  designated  internal-revenue  offi- 
cer a  copy  of  its  constitution,  charter,  agreement  of  asso- 
ciation, by-laws,  and  regulations,  and  all  amendments 
thereto,  as  the  same  may  from  time  to  time  be  adopted, 
and  the  names  and  addresses  of  new  members  as  from 
time  to  time  admitted  to  membership. 

The  statements  required  by  these  regulations  shall  be 
made  upon  forms  to  be  prescribed  by  the  Commissioner 
of  Internal  Revenue.123 

Records  and  Certificates.  Every  collector  of  internal 
revenue  or  other  designated  internal-revenue  officer  shall 
file  and  preserve  each  statement,  or  registration  made  to 
him  in  accordance  with  these  regulations,  and  shall  issue 
to  the  person  making  such  statement  a  certificate  of  reg- 
istry showing  the  date  of  issue,  the  name  of  the  person, 
the  nature  of  the  business  for  which  the  certificate  is 
granted,  and  the  date  of  the  expiration  of  the  registra- 

123  Reg.  No.  40,  Part  2,  Art.  2. 


848  HOLMES   INCOME   TAX   SUPPLEMENT 

tion,  which  certificate  shall  be  signed  by  the  collector  or 
other  designated  internal-revenue  officer,  and  shall  at 
all  times  during  the  period  for  which  it  is  issued  be  post- 
ed in  some  prominent  place  in  the  office  of  the  person 
receiving  it.  If  the  business  of  such  person  is  conducted 
at  more  than  one  place,  a  certificate  shall  be  so  posted  in 
each  such  place  of  business.124 

Records  by  Sellers  and  Buyers.  All  persons  who 
make  sales  or  contracts  of  sales,  including  so-called 
"transferred  or  scratch  sales,"  "pass  outs,"  "pair-offs," 
or  "matched  trades,"  and  all  other  forms  of  sale  of  any 
product  or  merchandise  at,  on,  in,  or  under  the  rules  or 
customs  of  any  exchange  for  future  delivery  shall  keep 
a  record  showing: 

(a)  Date  when  contract  was  made. 

(b)  Name  and  address  of  the  other  party  to  the  con- 
tract. 

(c)  Name  of  person  executing  the  contract. 

(d)  Whether  the  transaction  is  a  purchase  or  sale. 

(e)  Quantity  of  product,  merchandise,  or  commodity 
involved;  whether  in  tons,  pounds,  bales,  bushels,  bags, 
mats,  barrels,  gallons,  or  other  unit  of  measure  or  weight, 
as  the  case  may  be. 

(f)  Name  of  product,  merchandise,  or  commodity, 
including  (if  not  a  basis  grade  contract)  grade,  type, 
sample,  or  description. 

(g)  Name  of  customer. 

(h)  Whether  the  contract  is  a  "basis  grade"  con- 
tract. 

(i)   Time  specified  in  contract  for  delivery. 

(j)   Specified  price  per  ton,  pound,  mat,  bale,  bag, 

124  Reg.  No.  40,  Part  2,  Art.  3. 


STAMP    TAX  849 

bushel,  barrel,  gallon,  or  other  unit  of  measure  or  weight, 
as  the  ease  may  be. 

(k)   Gross  amount  of  sale  or  purchase. 

(1)   Amount  of  tax  paid. 

(m)  Whether  the  order  for  sale  or  purchase  was  of 
domestic  (meaning  the  continental  United  States)  or 
foreign  origin  (meaning  from  countries  other  than  the 
continental  United  States). 

(n)   Date  of  delivery  or  settlement. 

(o)   Method  of  fulfillment  or  settlement. 

Persons  who  use  such  forms  may  incorporate  additional 
columns  which  would  be  of  use  to  them,  such  columns  to 
be  placed  in  such  positions  as  not  to  interfere  with  the 
columns  and  headings  prescribed.  Such  record  forms 
will  not  be  supplied  by  the  department.184* 

The  records  required  by  these  regulations  shall  be 
legibly  written  in  ink  and  kept  separate  in  books,  and 
contracts  of  sale  for  future  delivery  of  two  or  more  dis- 
tinct products  or  merchandise  shall  be  kept  separate. 
Any  person  who  executes  or  makes  such  contracts  of  sale 
shall  preserve  the  trading  cards,  memoranda,  or  slips 
of  each  transaction,  and  the  purchaser  shall  preserve  the 
bill,  memorandum,  or  evidence  of  sale  to  which  the  stamps 
are  affixed,  for  the  period  of  two  years.125 

Records  to  Be  Kept  by  Clearing  Houses.  All  persons 
who  act  in  the  capacity  of  a  clearing  house  or  clearing 
association  shall  keep  a  record  showing: 

(a)  Name  of  person  for  whom  each  contract  is  cleared. 

(b)  Date  when  contract  was  made. 

(c)  Whether  the  transaction  is  a  purchase  or  sale. 

124a  The  regulation  sots  forth  in  full  the  form  of  record  required. 
Rooks  containing  such  forms  are  now  supplied  by  the  leading 
stationers  in  the  large  cities. 

125  Keg.  No.  40,  Part  2,  Art.  6. 


850  HOLMES    INCOME   TAX   SUPPLEMENT 

(d)  Quantity  of  product,  merchandise,  or  commodity 
involved,  whether  in  tons,  pounds,  bales,  bushels,  bags, 
mats,  barrels,  gallons,  or  other  unit  of  measure  or  weight, 
as  the  case  may  be. 

(e)  Name  of  product,  merchandise,  or  commodity,  in- 
cluding (if  not  a  basis-grade  coutract)  grade,  type,  sam- 
ple, or  description. 

(f)  Whether  the  contract  is  a  basis-grade  contract. 

(g)  Time  specified  in  contract  for  delivery, 
(h)  Date  of  settlement. 

(i)  Method  of  settlement. 

Records  of  sales  for  future  delivery  of  two  or  more 
distinct  products  or  merchandise  must  be  kept  sep- 
arate.126 

Returns  by  Members  of  Exchanges.  All  persons  who 
make  contracts  of  sale  of  any  commodity,  product,  or 
merchandise,  at,  on,  or  in  any  exchange,  board  of  trade, 
or  other  similar  place  of  business,  for  future  delivery, 
whether  such  contracts  shall  be  cleared  and  adjusted 
through  a  clearing  house,  or  clearing  association,  or  di- 
rectly between  the  seller  and  buyer,  or  otherwise,  shall 
on  or  before  the  fifteenth  day  of  each  month,  and  at  any 
other  time  required  by  the  Commissioner  of  Internal 
Revenue,  make  return,  in  writing,  to  the  Commissioner 
of  Internal  Revenue,  or  some  officer  designated  by  him, 
for  the  preceding  month  or  any  other  period,  verified  be- 
fore some  officer  authorized  to  administer  oaths,  showing : 

(a)  The  number  of  contracts  of  sale  and  purchase  of 
each  product,  merchandise,  or  commodity  brought  for- 
ward from  the  preceding  month. 

(b)  The  number  of  contracts  of  sale  and  purchase  of 
each  product,  merchandise,  or  commodity  during  the  cur- 
rent month. 

126  Reg.  No.  40,  Part  2,  Art.  7. 


STAMP   TAX  851 

(c)  The  month  in  which  the  products,  merchandise, 
or  commodity  is  to  be  delivered. 

(d)  The  method  of  settlement  of  each  contract,  i.  e., 
whether  by  "actual  delivery,"  "notice,"  "ring,"  "di- 
rect," "transfer,"  or  "scratch  sale,"  "pair  off,"  or 
"matched,"  "pass  out,"  "set-off,"  "give  up,"  through 
a  clearing  house  or  clearing  association,  or  otherwise. 

(e)  The  gross  amount  of  the  contracts  of  sale. 

(f )  The  tax  paid  thereon. 

(g)  The  number  of  contracts  both  of  purchase  and  sale 
left  open  at  the  end  of  the  month. 

(h)  The  amount  of  stamps  on  hand  from  preceding 
month. 

(i)   The  amount  of  stamps  purchased  during  month. 

(j)   The  amount  of  stamps  used  during  month. 

(k)  Balance  of  stamps  on  hand  at  end  of  month. 

(1)  The  origin  of  the  order  of  the  contracts,  whether 
domestic  or  foreign. 

Such  returns  shall  be  made  upon  forms  to  be  furnished, 
upon  application,  by  the  collector  of  internal  revenue, 
or  other  designated  officer  of  the  district  in  which  the 
exchange,  board  of  trade,  or  other  similar  place  is  lo- 
cated.127 

Returns  by  Clearing  Houses.  Every  clearing  house, 
or  clearing  association,  shall  on  or  before  the  15th  day  of 
each  month,  and  at  any  other  time  required,  render  in 
writing,  under  oath,  a  return,  for  the  preceding  month 
or  for  any  other  period  designated,  to  the  Commissioner 
of  Internal  Revenue  of  all  facts  in  their  possession  show- 
ing: 

a  )   The  number  of  contracts  "long"  and  "short"  for 
each  member  brought  forward  from  the  preceding  month. 

12V  Reg.  No.    I".  Part  2,  Art.  8. 
F.  1.  Tax  Supp.— 13 


852  HOLMES   INCOME   TAX  SUPPLEMENT 

(b)  The  number  of  contracts  bought  or  sold  by  each 
member  of  the  association. 

(c)  The  number  of  tons,  pounds,  bales,  bushels,  bags, 
mats,  barrels,  or  gallons,  or  other  units  of  weight  or 
measure  involved  in  such  contracts,  as  the  case  may  be. 

(d)  The  month  in  which  such  product,  merchandise, 
or  commodity  is  to  be  delivered. 

(e)  The  method  of  settlement  of  said  contracts — i.  e., 
whether  by  ' '  set-off, "  "  notice, "  or  "  delivery, "  or  by  any 
other  method. 

(f)  The  number  of  open  contracts  "long"  and  "short" 
for  each  member  carried  to  the  following  month. 

Such  returns  shall  be  made  upon  forms  to  be  furnished, 
upon  application,  by  the  collector  of  internal  revenue  of 
the  district,  or  other  designated  officer,  in  which  the 
clearing  house  or  clearing  association  is  situated.128 

Failure  to  Make  Returns.  If  any  person,  or  clearing 
house  or  clearing  association,  required  to  make  returns 
by  this  act,  or  the  regulations  thereunder,  shall  fail  or 
refuse  to  make  any  return  within  the  time  prescribed 
in  these  regulations,  or  designated  by  the  Commissioner 
of  Internal  Revenue,  then  the  same  shall  be  made  by 
an  internal  revenue  officer,  upon  inspection  of  the  books 
and  papers  of  the  person,  or  clearing  house,  or  clearing 
association,  so  required;  but  the  making  of  said  return 
by  an  internal-revenue  officer  shall  not  relieve  the  person 
in  default  from  any  penalty  incurred  by  reason  of  his 
failure  to  make  such  return. 

Any  officer  designated  by  the  Commissioner  of  Internal 
Revenue  shall  have  authority  to  examine  the  books,  pa- 
pers, and  records  kept  pursuant  to  these  regulations,  and 
may  require  the  production  of  any  other  books,  records, 

128  Reg.  No.  40,  Part  2,  Art.  9. 


STAMP    TAX  853 

papers,  or  statements  of  account,  necessary  to  determine 
any  liability  to  the  tax  imposed  by  this  act,  or  the  ob- 
servance of  the  provisions  of  the  regulations  made  in 
accordance  therewith.129 

Sale  of  Stamps.  No  person  other  than  a  collector  of 
internal  revenue,  or  duly  authorized  deputy  collector  of 
internal  revenue,  assistant  treasurer,  or  designated  de- 
positary of  the  United  States,  in  the  district  in  which  is 
Located  an  exchange,  shall  sell  or  expose  for  sale,  traf- 
fic in,  trade,  barter,  or  exchange  any  stamp  required  by 
law  or  by  these  regulations  to  be  used  for  the  payment  of 
taxes  upon  sales  or  contracts  of  sale  of  any  product  or 
merchandise  in  future  delivery. 

All  requisitions  for  such  stamps  shall  be  made  in  writ- 
ing on  a  form  prescribed  by  the  Commissioner  of  Inter- 
nal Revenue,  to  the  collector  of  internal  revenue,  an  as- 
sistant treasurer,  or  designated  depositary  in  the  inter- 
nal-revenue district  in  which  the  stamps  are  to  be  used, 
giving  the  date  thereof,  the  number  and  denomination  of 
stamps  applied  for,  and  the  name  and  address  of  the  pur- 
chaser, and  shall  be  sia-ned  in  ink  by  the  person  receiving 
the  stamps.  If  the  requisition  for  such  stamps  shall  be 
made  to  any  assistant  treasurer  or  designated  depositary 
of  the  United  States,  such  assistant  treasurer  or  desig- 
nated depositary  shall  keep  a  record  thereof,  and  at  the 
end  of  each  month  shall  filo  such  requisitions  with  his 
monthly  report  with  the  collector  of  internal  revenue  of 
the  district  in  which  said  assistant  treasurer  or  designat- 
ed depositary  is  located.  The  collector  of  internal  revenue 
shall  keep  the  requisitions  for  such  stamps  made  to  him 
and  those  filed  by  such  assistant  treasurer  or  designated 
depositary  separate  and  apart  from  all  other  requisitions 

129  Keg.  No.  40,  Part  2,  Art.  10. 


854  HOLMES   INCOME   TAX   SUPPLEMENT 

for  stamps  and  preserve  them  in  his  office  for  a  period  of 
two  years. 

The  stamps  shall  be  of  a  color  and  design  prescribed  by 
the  Commissioner  of  Internal  Revenue.130 

Penalties.  The  present  law  contains  no  provision 
that  an  unstamped  instrument  shall  be  void  or  shall  not 
be  admitted  as  evidence  in  the  courts  or  shall  not  be  placed 
on  record.  Anyone  who  makes,  signs,  issues  or  accepts 
an  instrument  without  the  tax  being  paid  or  consigns  or 
ships  an  article  without  the  tax  being  paid  or  manufac- 
tures or  imports  or  sells  playing  cards  without  the  tax 
being  paid  or  makes  use  of  a  stamp  without  canceling  or 
obliterating  the  same  is  guilty  of  a  misdemeanor  punish- 
able by  a  fine  of  not  more  than  one  hundred  dollars  for 
each  offense.  The  penalty  for  fraudulent  removal  or 
reuse  of  a  stamp  or  having  possession  of  washed,  restored 
or  altered  stamps  removed  from  any  instrument  is  a  fine 
of  not  more  than  one  thousand  dollars  or  imprisonment 
for  not  more  than  five  years  or  both,  at  the  discretion  of 
the  court.131 

130  Keg.  No.  40,  Part  2,  Art.  11. 

131  Act  of  October  3,  1917,  Sections  802  and  803. 


TEXT  OF  WAR  EXCESS  PROFITS  TAX  LAW 

TITLE  II  OF  THE  ACT  OF  OCTOBER  3,  1917 

See.  200.  That  when  used  in  this  title — 

The  term  "corporation"  includes  joint-stock  companies  or 
associations,  and  insurance  companies; 

The  term  "domestic"  means  created  under  the  law  of  .the 
United  States,  or  of  any  State,  Territory  or  District  thereof,  and 
the  term  "foreign"  means  created  under  the  law  of  any  other 
possession  of  the  United  States  or  of  any  foreign  country  or  gov- 
ernment; 

The  term  "United  States"  means  only  the  States,  the  Territo- 
ries of  Alaska  and  Hawaii,  and  the  District  of  Columbia; 

The  term  "taxable  year"  means  the  twelve  months  ending 
December  thirty-first,  excepting  in  the  case  of  a  corporation  or 
partnership  which  has  fixed  its  own  fiscal  year,  in  whicb  case  it 
means  such  fiscal  year.  The  first  taxable  year  shall  be  the  year 
ending  December  thirty -first,  nineteen  hundred  and  seventeen,  ex- 
cept that  in  the  case  of  a  corporation  or  partnership  which  has 
fixed  its  own  fiscal  year,  it  shall  be  the  fiscal  year  ending  during 
the  calendar  year  nineteen  hundred  and  seventeen.  If  a  corpo- 
ration or  partnership,  prior  to  March  first,  nineteen  hundred  and 
eighteen,  makes  a  return  covering  its  own  fiscal  year,  and  includes 
therein  the  income  received  during  that  part  of  the  fiscal  year 
falling  within  the  calendar  year  nineteen  hundred  and  sixteen,  the 
t:ix  for  such  taxable  year  shall  be  that  proportion  of  the 
tax  computed  upon  the  net  income  during  such  fiscal  year 
which  the  time  from  January  first,  nineteen  hundred  and  seven 
teen,  to  the  end  of  such  fiscal  year  bears  to  the  full  fiscal  year; 
and 

The  term  "prewar  period"  means  the  calendar  years  nineteen 
hundred  and  eleven,  nineteen  hundred  and  twelve,  and  nineteen 
hundred  ami  thirteen,  or,  if  a  corporation  or  partnership  was  not 
in  existence  or  an  individual  was  not  engaged  in  a  trade  or  business 
during  the  whole  of  such  period,  then  as  many  of  such  years  dur- 

S55 


856  HOLMES   INCOME    TAX   SUPPLEMENT 

ing  the  whole  of  which  the  corporation  or  partnership  was  in  exist- 
ence or  the  individual  was  engaged  in  the  trade  or  business. 

The  terms  '  trade ' '  and  ' '  business ' '  include  professions  and  occu- 
pations. 

The  term  "net  income"  means  in  the  case  of  a  foreign  cor- 
poration or  partnership  or  a  non-resident  alien  individual,  the  net 
income  received  from  sources  within  the  United  States. 

Sec.  201.  That  in  addition  to  the  taxes  under  existing  law  and 
under  this  Act  there  shall  be  levied,  assessed,  collected,  and  paid 
for  each  taxable  year  upon  the  income  of  every  corporation,  part- 
nership, or  individual,  a  tax  (hereinafter  in  this  title  referred  to 
as  the  tax)  equal  to  the  following  percentages  of  the  net  income: 

Twenty  per  centum  of  the  amount  of  the  net  income  in  excess 
of  the  deduction  (determined  as  hereinafter  provided)  and  not 
in  excess  of  fifteen  per  centum  of  the  invested  capital  for  the 
taxable  year; 

Twenty-five  per  centum  of  the  amount  of  the  net  income  in 
excess  of  fifteen  per  centum  and  not  in  excess  of  twenty  per  centum 
of  such  capital; 

Thirty-five  per  centum  of  the  amount  of  the  net  income  in  ex- 
cess of  twenty  per  centum  and  not  in  excess  of  twenty-five  per 
centum  of  such  capital; 

Forty-five  per  centum  of  the  amount  of  the  net  income  in  excess 
of  twenty -five  per  centum  and  not  in  excess  of  thirty-three  per 
centum  of  such  capital;  and 

Sixty  per  centum  of  the  amount  of  the  net  income  in  excess  of 
thirty-three  per  centum  of  such  capital. 

For  the  purpose  of  this  title  every  corporation  or  partnership 
not  exempt  under  the  provisions  of  this  section  shall  be  deemed  to 
be  engaged  in  business,  and  all  the  trades  and  businesses  in  which 
it  is  engaged  shall  be  treated  as  a  single  trade  or  business,  and  all 
its  income  from  whatever  source  derived  shall  be  deemed  to  be 
received  from  such  trade  or  business. 

This  title  shall  apply  to  all  trades  or  businesses  of  whatever 
description,  whether  continuously  carried  on  or  not,  except — 

(a)  In  the  case  of  officers  and  employees  under  the  United 
States,  or  any  State,  territory,  or  the  District  of  Columbia,  or  any 
locnl  sub-division  thereof,  the  compensation  or  fees  received  by 
them  as  such  officers  or  employees; 

(b)  Corporations  exempt  from  tax  under  the  provisions  of 
section  eleven  of  Title  I  of  such  act  of  September  eighth,  nineteen 


TEXT  OF  WAR   EXCESS  PROFITS   TAX  LAW  857 

hundred  and  sixteen,  as  amended  by  this  Act,  and  partnerships 
and  individuals  carrying  on  or  doing  the  same  business,  or  corning 
within  the  same  description;   and 

(f)  Incomes  derived  from  the  business  of  life,  health,  and 
accident  insurance  combined  in  one  policy  issued  on  the  weekly 
premium  payment  plan. 

Sec.  202.  That  the  tax  shall  not  be  imposed  in  the  case  of  the 
trade  or  business  of  a  foreign  corporation  or  partnership  or  a  non- 
resident alien  individual,  the  net  income  of  which  trade  or  business 
during  the. taxable  year  is  less  than  $3,000. 

Sec.  203.  That  for  the  purposes  of  this  title  the  deduction 
shall   be   as  follows,  except  as  otherwise  in  this  title  provided — 

(a)  In  the  case  of  a  domestic  corporation,  the  sum  of  (1)  an 
amount  equal  to  the  same  percentage  of  the  invested  capital  for  the 
taxable  year  which  the  average  amount  of  the  annual  net  income 
of  the  trade  or  business  during  the  prewar  period  was  of  the 
invested  capital  for  the  prewar  period  (but  not  less  than  seven  or 
more  than  nine  per  centum  of  the  invested  capital  for  the  taxable 
year),  and   (2)   $3,000; 

(ft)  In  the  case  of  a  domestic  partnership  or  of  a  citizen  or 
resident  of  the  United  States,  the  sum  of  (1)  an  amount  equal  to 
the  same  percentage  of  the  invested  capital  for  the  taxable  year 
which  the  average  amount  of  the  annual  net  income  of  the  trade 
or  business  during  the  prewar  period  was  of  the  invested  capital 
for  the  prewar  period  (but  not  less  than  seven  or  more  than  nine 
per  centum  of  the  invested  capital  for  the  taxable  year),  and  (2) 
$6,000; 

(c)  In  the  case  of  a  foreign  corporation  or  partnership  or  of 
a  nonresident  alien  individual,  an  amount  ascertained  in  the  same 
manner  as  provided  in  subdivisions  (a)  and  (b),  without  any  ex- 
emption of  $3,000  or  $6,000. 

(d)  If  the  Secretary  of  the  Treasury  is  unable  satisfactorily 
to  determine  the  average  amount  of  the  annual  net  income  of  the 
trade  or  business  during  the  prewar  period,  the  deduction  shall 
be  determined  in  the  same  manner  as  provided  in  section  two 
hundred   and  five. 

Sec.  204.  That,  if  a  corporation  or  partnership  was  not  in 
existence,  or  an  individual  was  not  engaged  in  the  trade  or  busi- 
ness, during  the  whole  of  any  one  calendar  year  during  the  prewar 
period,  the  deduction  shall  be  an  amount  equal  to  eight  per  centum 
of  the  invested  capital  for  the  taxable  year,  plus  in  the  case  of 


858  HOLMES   INCOME   TAX   SUPPLEMENT 

a  domestic  corporation  $3,000,  and  in  the  case  of  a  domestic  part- 
nership or  a  citizen  or  resident  of  the  United  States  $6,000. 

A  trade  or  business  carried  on  by  a  corporation,  partnership,  or 
individual,  although  formally  organized  or  reorganized  on  or  after 
January  second,  nineteen  hundred  and  thirteen,  which  is  substan- 
tially a  continuation  of  a  trade  or  business  carried  on  prior  to 
that  date,  shall,  for  the  purposes  of  this  title,  be  deemed  to  have 
been  in  existence  prior  to  that  date,  and  the  net  income  and  in- 
vested capital  of  its  predecessor  prior  to  that  date  shall  be 
deemed  to  have  been  its  net  income  and  invested  capital. 

See.  205.  (a)  That  if  the  Secretary  of  the  Treasury,  upon  com- 
plaint finds  either  (1)  that  during  the  prewar  period  a  domestic 
corporation  or  partnership,  or  a  citizen  or  resident  of  the  United 
States,  had  no  net  income  from  the  trade  or  business,  or  (2)  that 
during  the  prewar  period  the  percentage,  which  the  net  income  was 
of  the  invested  capital,  was  low  as  compared  with  the  percentage, 
which  the  net  income  during  such  period  of  representative  cor- 
porations, partnerships,  and  individuals,  engaged  in  a  like  or  sim- 
ilar trade  or  business,  was  of  their  invested  capital,  then  the 
deduction  shall  be  the  sum  of  (1)  an  amount  equal  to  the  same 
percentage  of  its  invested  capital  for  the  taxable  year  which  the 
average  deduction  (determined  in  the  same  manner  as  provided 
in  section  two  hundred  and  three,  without  including  the  $3,000 
or  $6,000  therein  referred  to)  for  such  year  of  representative 
corporations,  partnerships  or  individuals,  engaged  in  a  like  or 
similar  trade  or  business,  is  of  their  average  invested  capital  for 
such  year,  plus  (2)  in  the  case  of  a  domestic  corporation  $3,000, 
and  in  the  case  of  a  domestic  partnership  or  a  citizen  or  resident 
of  the  United  States  $6,000. 

The  percentage  which  the  net  income  was  of  the  invested  capital 
in  each  trade  or  business  shall  be  determined  by  the  Commissioner 
of  Internal  Revenue,  in  accordance  with  the  regulations  prescribed 
by  him,  with  the  approval  of  the  Secretary  of  the  Treasury.  In 
the  case  of  a  corporation  or  partnership  which  has  fixed  its  own 
fiscal  year,  the  percentage  determined  by  the  calendar  year  ending 
.luring  such  fiscal  year  shall  be  used. 

(&)  The  tax  shall  be  assessed  upon  the  basis  of  the  deduction 
determined  as  provided  in  section  two  hundred  and  three,  but  the 
taxpayer  claiming  the  benefit  of  this  section  may  at  the  time  of 
making  the  return  file  a  claim  for  abatement  of  the  amount  by 
which  the  tax  so  assessed  exceeds  a  tax  computed  upon  the  basis 


TEXT  OF   WAR   EXCESS   PROFITS  TAX   LAW  859 

of  tin'  deduction  determined  as  provided  in  this  section.  In  such 
event,  collection  of  the  part  of  the  tax  covered  by  such  claim  for 
abatement  shall  not  bo  made  until  the  claim  is  decided,  bul  if  in 
the  judgment  of  the  Commissioner  of  Internal  Revenue,  the  inter- 
ests of  the  United  States  would  be  jeopardized  thereby  lie  may 
require  the  claimant  to  jjive  a  bond  in  such  amount  and  with  such 
sureties  as  the  Commissioner  may  think  -wise  to  safeguard  such 
interests,  conditioned  for  the  payment  of  any  tax  found  to  be  due, 
with  the  interest  thereon,  and  if  such  bond,  satisfactory  to  the 
Commissioner,  is  not  given  within  such  time  as  he  prescribes,  the 
full  amount  of  the  tax  assessed  shall  be  collected  and  the  amount 
overpaid,  if  any,  shall  upon  final  decision  of  the  application  be 
refunded  as  a  tax  erroneously  or  illegally  collected. 

Sec.  206.  That  for  the  i>urposes  of  this  title  the  net  income  of  a 
corporation  shall  be  ascertained  and  returned  (a)  for  the  calendar 
years  nineteen  hundred  and  eleven  and  nineteen  hundred  and  twelve 
upon  the  same  basis  and  in  the  same  manner  as  provided  in  section 
thirty-eight  of  the  Act  entitled  "An  Act  to  provide  revenue, 
equalize  duties,  and  encourage  the  industries  of  the  United  States, 
and  for  other  purposes,"  approved  August  fifth,  nineteen  hundred 
and  nine,  except  that  income  taxes  paid  by  it  within  the  year 
imposed  by  the  authority  of  the  United  states  shall  be  included; 
(b)  for  the  calendar  year  nineteen  hundred  and  thirteen  upon 
the  same-  basis  and  in  the  same  manner  as  provided  in  section  11 
of  the  Act  entitled  "An  Act  to  reduce  tariff  duties  and  to  pro 
vide  revenuo  for  the  Government,  and  for  other  purposes,''  ap- 
proved October  third,  nineteen  hundred  and  thirteen,  except  that 
income  taxes  paid  by  it  within  the  year  imposed  by  the  authority 
of  the  United  States  shall  be  included,  and  except  that  the 
amounts  received  by  it  as  dividends  upon  the  stock  or  from  the 
net  earnings  of  other  corporations,  joinl  -tuck  companies  or  asso 
ciations,  oi  insurance  companies,  subject  to  the  tax  imposed  by 
section  TT  of  such  Act  of  October  third,  nineteen  hundred  and  thir 
teen,  shall  be  deducted;  and  (r)  for  the  taxable  year  upon  the 
same  basis  and  in  the  same  manner  as  provided  in  Title  I  of  the 
Act.  entitled  "An  Act  to  increase  the  revenue,  and  for  other  pur- 
poses," approved  September  eighth,  nineteen  hundred  and  six- 
teen, as  amended  by  this  Act.  except  that  the  amounts  received  by 
it  as  dividends  upon  the  stock  or  from  the  net  earnings  of  other 
corporations,  joint  stock  companies  or  associations,  or  insurance 
companies,  subject  to  the  tax  imposed  by  Title  I  of  such  Act  of 


860  HOLMES   INCOME   TAX   SUPPLEMENT 

September  eighth,  nineteen  hundred  and  sixteen,  shall  be  deducted. 

The  net  income  of  a  partnership  or  individual  shall  be  ascer- 
tained and  returned  for  the  calendar  years  nineteen  hundred  and 
eleven,  nineteen  hundred  and  twelve,  and  nineteen  hundred  and 
thirteen,  and  for  the  taxable  year,  upon  the  same  basis  and  in  the 
same  manner  as  provided  in  Title  I  of  such  Act  of  September 
eighth,  nineteen  hundred  and  sixteen,  as  amended  by  this  Aet, 
except  that  the  credit  allowed  by  subdivision  (6)  of  section  five 
of  such  Act  shall  be  deducted.  There  shall  be  allowed  (a)  in  the 
case  of  a  domestic  partnership  the  same  deductions  as  allowed  to 
individuals  in  subdivision  (a)  of  section  five  of  such  Aet  of  Sep- 
tember eighth,  nineteen  hundred  and  sixteen,  as  amended  by  this 
Act;  and  (6)  in  the  case  of  a  foreign  partnership  the  same  deduc- 
tions as  allowable  to  individuals  in  subdivision  (a)  of  section  six 
of  such  Act  as  amended  by  this  Act. 

Sec.  207.  That  as  used  in  this  title  the  term  "invested  capital" 
for  any  year  means  the  average  invested  capital  for  the  year,  as 
defined  and  limited  in  this  title,  averaged  monthly. 

As  used  in  this  title  "invested  capital"  does  not  include  stocks, 
bonds  (other  than  obligations  of  the  United  States),  or  other  assets, 
the  income  from  which  is  not  subject  to  the  tax  imposed  by  this 
title,  nor  money  or  other  property  borrowed,  and  means,  subject 
to  the  above  limitations: 

(a)  In  the  case  of  a  corporation  or  partnership:  (1)  actual 
cash  paid  in,  (2)  the  actual  cash  value  of  tangible  property  paid 
in  other  than  cash,  for  stock  or  shares  in  such  corporation  or  part- 
nership, at  the  time  of  such  payment  (but  in  case  such  tangible 
property  was  paid  in  prior  to  January  first,  nineteen  hundred  and 
fourteen,  the  actual  cash  value  of  such  property  as  of  January 
first,  nineteen  hundred  and  fourteen,  but  in  no  case  to  exceed  the 
par  value  of  the  original  stock  or  shares  specifically  issued  there- 
for), and  (3)  paid  in  or  earned  surplus  and  undivided  profits  vsed 
or  employed  in  the  business,  exclusive  of  undivided  profits  earned 
during  the  taxable  year;  Provided,  That  (a)  the  actual  cash  value 
of  patents  and  copyrights  paid  in  for  stock  or  shares  in  such  cor- 
poration or  partnership,  at  the  time  of  such  payment,  shall  be 
included  as  invested  capital,  but  not  to  exceed  the  par  value  of 
such  stock  or  shares  at  the  time  of  such  payment,  and  (6)  the 
good  will,  trade  marks,  trade  brands,  the  franchise  of  a  corpora- 
tion or  partnership,  or  other  intangible  property,  shall  be  included 
a s  invested  capital  if  the  corporation  or  partnership  made  payment 


TEXT  OF  WAR   EXCESS  PROFITS  TAX  LAW  861 

liona  fide  therefor  specifically  as  such  in  cash  or  tangible  property, 
the  value  of  such  good  will,  trade  mark,  trade  brand,  franchise, 
or  intangible  property,  not  to  exceed  the  actual  cash  or  actual  cash 
value  of  the-  tangible  property  paid  therefor  at  the  time  of 
payment;  but  good  will,  trade  marks,  trade  brands,  franchise  of 
a  corporation  or  partnership,  or  other  intangible  property,  bona 
fide  purchased,  prior  to  March  third,  nineteen  hundred  and  seven- 
teen, for  and  with  interests  or  shares  in  a  partnership  or  for  and 
with  shares  in  the  capital  stock  of  a  corporation  (issued  prior  to 
March  third,  nineteen  hundred  and  seventeen),  in  an  amount  not 
to  exceed,  on  March  third,  nineteen  hundred  and  seventeen,  twenty 
per  centum  of  the  total  interests  or  shares  in  the  partnership  or  of 
the  total  shares  of  the  capital  stock  of  the  corporation,  shall  be 
included  in  invested  capital  at  a  value  not  to  exceed  the  actual 
cash  value  at  the  time  of  such  purchase,  and  in  case  of  issue  of 
stock  therefor  not  to  exceed  the  par  value  of  such  stock; 

(b)  In  the  case  of  an  individual,  (1)  actual  cash  paid  into  the 
trade  or  business,  and  (2)  the  actual  cash  value  of  tangible  prop- 
erty paid  into  the  trade  or  business,  other  than  cash,  at  the  time 
of  such  payment  (but  in  case  such  tangible  property  was  paid  in 
prior  to  January  first,  nineteen  hundred  and  fourteen,  the  actual 
cash  value  of  Mich  property  as  of  January  first,  nineteen  hundred 
and  fourteen),  and  (3)  the  actual  cash  value  of  patents,  copy- 
rights, good  will,  trade  marks,  trade  brands,  franchises,  or  other 
intangible  property,  paid  into  the  trade  or  business,  at  the  time  of 
such  payment,  if  payment  was  made  therefor  specifically  as  such 
in  cash  or  tangible  property,  not  to  exceed  the  actual  cash  or 
actual  cash  value  of  the  tangible  property  bona  fide  paid  therefor 
at  the  time  of  such  payment. 

In  the  case  of  a  foreign  corporation  or  partnership  or  of  a  non- 
resident alien  individual  the  term  "invested  capital"  means  that 
proportion  of  the  entire  invested  capital,  as  defined  and  limited 
in  this  title,  which  the  net  income  from  sources  within  the  United 
States  bears  to  the  entire  net  income. 

Sec.  208.  That  in  case  of  the  reorganization,  consolidation, 
or  change  of  ownership  of  a  trade  or  business  after  March  third, 
nineteen  hundred  ami  seventeen,  if  an  interest  or  control  in  such 
trade  or  business  of  fifty  per  centum  or  more  remains  in  control 
of  the  same  persons,  corporations,  associations,  partnerships,  or  any 
of  them,  then  in  ascertaining  the  invested  capital  of  the  trade  or 
business  no  assel    transferred  or   received  from   the  prior  trade  or 


862  HOLMES   INCOME   TAX   SUPPLEMENT 

business  shall  .be  allowed  a  greater  value  than  would  have  been 
allowed  under  this  title  in  computing  the  invested  capital  of  such 
prior  trade  or  business  if  such  asset  had  not  been  so  transferred 
or  received,  unless  such  asset  was  paid  for  specifically  as  such,  in 
cash  or  tangible  property,  and  then  not  to  exceed  the  actual  cash 
or  actual  cash  value  of  the  tangible  property  paid  therefor  at  the 
time  of  such  payment. 

Sec.  209.  That  in  the  case  of  a  trade  or  business  having  no 
invested  capital  or  not  more  than  a  nominal  capital  there  shall  be 
levied,  assessed,  collected  and  paid,  in  addition  to  the  taxes  under 
existing  law  and  under  this  act,  in  lieu  of  the  tax  imposed  by  sec- 
tion two  hundred  and  one,  a  tax  equivalent  to  eight  per  centum  of 
the  net  income  of  such  trade  or  business,  in  excess  of  the  follow- 
ing deductions:  in  the  case  of  a  domestic  corporation,  $3,000,  and 
in  the  case  of  a  domestic,  partnership  or  a  citizen  or  resident  of 
the  United  States,  $6,000;  in  the  case  of  all  other  trades  or  busi 
ness,  no  deduction. 

Sec.  210.  That  if  the  Secretary  of  the  Treasury  is  unable  in 
any  case  satisfactorily  to  determine  the  invested  capital,  the  amount 
of  the  deduction  shall  be  the  sum  of  (1)  an  amount  equal  to  the 
same  proportion  of  the  net  income  of  the  trade  or  business  received 
.luring  the  taxable  year  as  the  proportion  which  the  average  deduc- 
tion (determined  in  the  same  manner  as  provided  in  section  two 
hundred  and  three,  without  including  the  $3,000  or  $6,000  therein 
referred  to)  for  the  same  calendar  year  of  representative  corpora- 
tions, partnerships,  and  individuals,  engaged  in  a  like  or  similar 
trade  or  business,  bears  to  the  total  net  income  of  the  trade  or 
business  received  by  such  corporations,  partnerships,  and  individ- 
uals plus  (2)  in  the  case  of  a  domestic  corporation  $3,000,  and  in 
the  case  of  a  domestic  partnership  or  a  citizen  or  resident  of  the 
United  States  $6,000. 

For  the  purpose  of  this  section  the  proportion  between  the 
deduction  and  the  net  income  in  each  trade  or  business  shall  be 
determined  by  the  Commissioner  of  Internal  Revenue  in  accordance 
with  regulations  prescribed  by  him,  with  the  approval  of  the  Sec- 
retly of  the  Treasury.  In  the  case  of  a  corporation  or  part- 
nership  which  has  fixed  its  own  fiscal  year,  the  proportion  deter- 
mined for  the  calendar  year  ending  dining  such  fiscal  year  shall 
be  used. 

See.  211.  That  every  foreign  partnership  having  a  net  income 
of  $3,000  or  more  for  the  taxable  year,  and  every  domestic  part- 


TEXT  OP  WAR  EXCESS  PROFITS   TAX  LAW  M'.:', 

uership  having  a  nel  income  of  $6,000  or  more  for  the  taxable  year, 
shall  render  a  correct  return  of  the  income  of  the  trade  or  business 
for  the  taxable  year,  setting  forth  specifically  the  gross  income  for 
ii  year,  and  the  deductions  allowed  in  this  title.  Such  returns 
shall  be  rendered  at  the  same  time  and  in  the  same  manner  as  is 
prescribed  for  income-tax  returns  under  Title  I  of  such  Act  of 
September  eighth,  nineteen  hundred  and  sixteen,  as  amended  by 
this  Act. 

Sec.  212.  That  all  administrative,  special,  and  general  provi- 
sions of  law,  including  the  laws  in  relation  to  the  assessment, 
remission,  collection,  and  refund  of  internal-revenue  taxes  not 
heretofore  specifically  repealed,  and  not  inconsistent  with  the  pro- 
visions of  this  title,  are  hereby  extended  and  made  applicable  to 
all  the  provisions  of  this  title  and  to  the  tax  herein  imposed,  and 
.-ill  provisions  of  Title  I  of  such  Act  of  September  eighth,  nine- 
teen hundred  and  sixteen,  as  amended  by  this  Act,  relating  to 
returns  and  payment  of  the  tax  therein  imposed,  including  pen- 
alties, are  hereby  made  applicable  to  the  tax  imposed  by  this  title. 

213.  That  the  Commissioner  of  Internal  Revenue,  with 
the  approval  of  the  Secretary  of  the  Treasury,  shall  make  all  neces- 
sary regulations  for  carrying  out  the  provisions  of  this  title,  and 
may  require  any  corporation,  partnership,  or  individual,  subject 
to  the  provisions  of  this  title,  to  furnish  him  with  such  facts,  data, 
and  information  as  in  his  judgment  are  necessary  to  collect  the  tax 
imposed  by  this  title. 

214.  That  Title  II  (sections  two  hundred  to  two  hundred 
and  seven,  inclusive)  of  the  Act  entitled  "An  Act  to  provide  in- 
creased revenue  to  defray  the  expenses  of  the  increased  appro- 
priations for  the  Army  and  Navy,  and  the  extensions  of  fortifica- 
tions, and  for  other  purposes."  approved  March  third,  nineteen 
hundred  and  seventeen,  is  hereby  repealed. 

Any  amount  heretofore  or  hereafter  paid  on  account  of  the  tax 
imposed  by  such  Title  11,  shall  l>e  credited  toward  the  payment  of 
the  tax  imposed  by  this  title,  and  if  the  amount  so  paid  exceeds 
the  amount  of  such  tax  the  excess  shall  be  refunded  as  a  tax 
erroneously  or  illegally  collected. 

Subdivision  (1)  of  section  three  hundred  and  one  of  such  Act  of 
September  eighth,  nineteen  hundred  and  sixteen,  is  hereby  amended 
so  that  the  rate  of  tax  for  the  taxable  year  nineteen  hundred  and 
seventeen  shall  be  ten  per  centum  instead  of  twelve  and  one-half 
per  centum,  as  therein  provided. 


864  HOLMES    INCOME    TAX   SUPPLEMENT 

Subdivision  (2)  of  such  section  is  hereby  amended  to  read  as 
follows: 

"(2)  This  section  shall  cease  to  be  of  effect  on  and  after 
January  first,  nineteen  hundred  and  eighteen." 


TEXT  OF  WAR  STAMP  TAX  LAW 
TITLE  VIII  OF  THE  ACT  OF  OCTOBER  3,  1917 

Sec.  800.  That  on  and  after  the  first  day  of  December,  nineteen 
hundred  and  seventeen,  there  shall  be  levied,  collected,  and  paid, 
for  and  in  respect  of  the  several  bonds,  debentures,  or  certificates  of 
stock  and  of  indebtedness,  and  other  documents,  instruments, 
matters  and  things  mentioned  and  described  in  Schedule  A  of  this 
title,  or  for  or  in  respect  of  the  vellum,  parchment,  or  paper  upon 
which  such  instruments,  matters,  or  things,  or  any  of  them,  are 
written  or  printed,  by  any  person,  corporation,  partnership,  or 
iation  who  makes,  signs,  issues,  sells,  removes,  consigns,  or 
ships  the  same,  or  for  whose  use  or  benefit  the  same  are  made, 
I,  issued,  sold,  removed,  consigned,  or  shipped,  the  several 
taxi's  specified  in  such  schedule. 

Sec.  801.  That  there  shall  not  be  taxed  under  this  title  any 
bond,  note,  or  other  instrument,  issued  by  the  United  States,  or 
by  any  foreign  Government,  or  by  any  State,  Territory,  or  the  Dis- 
trict of  Columbia,  or  local  subdivision  thereof,  or  municipal  or 
other  corporation  exercising  the  taxing  power,  when  issued  in  the 
exercise  of  a  strictly  governmental,  taxing,  or  municipal  function; 
or  stock  and  bonds  issued  by  cooperative  building  and  loan  asso- 
ciations which  are  arganized  and  operated  exclusively  for  the  bene- 
fit of  their  members  and  make  loans  only  to  their  shareholders,  or 
by  mutual  ditch  or  irrigating  companies. 

Sec.  802.  That  whoever— 

Jakes,  signs,  issues  or  accepts,  or  causes  to  be  made, 
signed,  issued,  or  accepted,  any  instrument,  document,  or  paper  of 
any  kind  or  description  whatsoever  without  the  full  amount  of  tax 
thereon  being  duly  paid; 

(b)  Consigns  or  ships,  or  causes  to  be  consigned  or  shipped,  by 
parcel  post  any  parcel,  package  or  article  without  the  full  amount 
of  tax  being  duly  paid; 

(V)  Manufactures  or  imports  and  sells,  or  offers  for  sale,  or 
causes  to  be  manufactured   or   imported  and  sold,  or  offered  for 


866  HOLMES  INCOME   TAX  SUPPLEMENT 

s;ile,  any  playing  cards,  package,  or  other  article  without  the  full 
amount  of  tax.  being  duly  paid; 

(d)  Makes  use  of  an  adhesive  stamp  to  denote  any  tax  imposed 
I iv  this  title  without  canceling  or  obliterating  such  stamp  as  pre- 
scribed in  section  eight  hundred  and  four; 

Is  guilty  of  a  misdemeanor  and  upon  conviction  thereof  shall 
pay  a  fine  of  not  more  than  $100  for  each  offense. 

Sec.  803.  That  whoever— 

(a)  Fraudulently  cuts,  tears,  or  removes  from  any  vellum, 
parchment,  paper,  instrument,  writing,  package,  or  article,  upon 
which  any  tax  is  imposed  by  this  title,  any  adhesive  stamp  or  the 
impression  of  any  stamp,  die,  plate,  or  other  article  provided, 
made,  or  used  in  pursuance  of  this  title;  (b)  Fraudulently  uses, 
joins,  fixes,  or  places  to,  with,  or  upon  any  vellum,  parchment, 
paper,  instrument,  writing,  package,  or  article,  upon  which  any 
tax  is  imposed  by  this  title,  (1)  any  adhesive  stamp,  or  the  impres- 
sion of  any  stamp,  die,  plate,  or  -other  article,  which  has  been  cut, 
torn,  or  removed  from  any  other  vellum,  parchment,  paper,  instru- 
ment, writing,  package,  or  article,  upon  which  any  tax  is  imposed 
by  this  title  or  (2)  any  adhesive  stamp  or  the  impression  of  any 
stamp,  die,  plate,  or  other  article  of  insufficient  value;  or  (3) 
any  forged  or  counterfeit  stamp,  or  the  impression  of  any  forged 
or  counterfeited  stamp,  die,  plate,  or  other  article; 

(c)  Willfully  removes,  or  alters  the  cancellation,  or  defacing 
marks  of,  or  otherwise  prepares,  any  adhesive  stamp,  with  intent 
to  use,  or  cause  the  same  to  be  used,  after  it  has  been  already  used, 
or  knowingly  or  willfully  buys,  sells,  offers  for  sale,  or  gives  away, 
any  such  washed  or  restored  stamp  to  any  person  for  use,  or 
knowingly  uses  the  same; 

(d)  Knowingly  and  without  lawful '  excuse  (the  burden  of 
proof  of  such  excuse  being  on  the  accused)  has  in  possession  any 
washed,  restored,  or  altered  stamp,  which  has  been  removed  from 
any  vellum,  parchment,  paper,  instrument,  writing,  package,  or 
article, 

is  guilty  of  a  misdemeanor,  and  upon  conviction  shall  be  pun- 
ished by  a  fine  of  not  more  than  $1,000,  or  by  imprisonment  for 
not  more  than  five  years,  or  both,  in  the  discretion  of  the  court, 
and  any  such  reused,  canceled,  or  counterfeit  stamp  and  the  vel- 
lum, parchment,  document,  paper,  package,  or  article  upon  which  it 
is  placed  or  impressed  shall  be  forfeited  to  the  United  States. 

Sec.  804.     That  whenever  an  adhesive  stamp  is  used  for  denot- 


i  BSXT  OP    W  AR  STAMP  TAX   DATV 

bag  anj  t;i\  Imposed  by  this  title,  except  as  hereinafter  provided, 
the  person,  corporation,  partnership,  or  association  using  or  affix- 
ing the  same  shall  write  or  stamp  or  cause  to  lie  written  or  stamped 
thereupon  the  initials  of  his  <>r  its  name  and  the  date  upon  which 
the  same  is  attached  or  used,  so  that  the  same  may  not  again  be 
used:  Provided,  Thai  the  Commissioner  of  Internal  Revenue  may 
prescribo  such  other  method  for  the  cancellation  of  such  Btamps 
as  he  may  deem  expedient. 

Sec.  805.  (a)  That  the  Commissioner  of  Internal  Revenue 
shall  cause  t<>  be  prepared  and  distributed  for  the  payment  of  the 
taxes  prescribed  in  this  title  suitable  stamps  denoting  the  tax  on 
the  document,  articles,  or  thing  to  which  the  same  may  be  affixed, 
ami  shall  prescribe  such  method  for  the  affixing  of  said  Btamps  in 
substitution  for  or  in  addition  to  the  method  provided  in  this  title, 
as  he  may  deem  expedient. 

(6)  The  Commissioner  of  Internal  Revenue,  with  the  approval 
of  the  Secretary  of  the  Treasury,  is  authorized  to  procure  any  of 
the  stamps  provided  for  in  this  title  by  contract  whenever  such 
stamps  cannol  be  speedily  prepared  by  the  Bureau  of  Engraving 
and  Printing;  but  this  authority  shall  expire  on  the  first  day  of 
January,  nineteen  hundred  and  eighteen,  except  as  to  imprinted 
stamps  furnished  under  contract,  authorized  by  the  Commissioner 
of  Internal  Revenue. 

(c)  All  internal-revenue  laws  relating  to  the  assessment  and 
collection  of  taxes  arc  hereby  extended  to  and  made  a  part  of  this 
title,  bo  far  as  applicable,  for  the  purpose  of  collecting  stamp  taxes 
omitted  through  mistake  or  fraud  from  any  instrument,  document. 
paper,  writing,  parcel,  package,  or  article  named  herein. 

.  806.  That  the  Commissioner  of  Internal  Revenue  shall 
furnish  to  the  Postmaster  General  without  prepayment  a  suitable 
quantity  of  adhesive  stamps  to  be  distributed  to  and  kept  on  sale 
by  the  various  postmasters  in  the  United  States.  The  Postmaster 
Genera]  may  require  each  such  postmaster  to  give  additional  or 
i uc leased  bond  as  postmaster  for  the  value  of  the  stamps  so  fur- 
nished, and  each  such  postmaster  shall  deposit  the  receipts  from 
the  sale  of  such  stamps  to  the  credit  of  and  voider  accounts  to  the 
Postmaster  General  at  such  times  r.nd  in  such  form  as  he  ihay  by 
regulations  prescribe.  The  Postmaster  General  shall  at  least  once 
monthly  transfer  all  collections  from  this  source  to  the  Treasury 
as  internal  revenue  collections. 

Sec.   807.   That  the  collectors  of  the  several   districts  shall   fur- 
F.  I.  Tax  Supp. — 14 


868  HOLMES   INCOME   TAX   SUPPLEMENT 

nish  without  prepayment  to  any  assistant  treasurer  or  designated 
depositary  of  the  United  States  located  in  their  respective  collec- 
tion districts  a  suitable  quantity  of  adhesive  stamps  for  sale.  In 
such  cases  the  collector  may  require  a  bond,  with  sufficient  sureties, 
to  an  amount  equal  to  the  value  of  the  adhesive  stamps  so  fur- 
nished, conditioned  for  the  faithful  return,  whenever  so  required, 
of  all  quantities  or  amounts  undisposed  of,  and  for  the  payment 
monthly  of  all  quantities  or  amounts  sold  or  not  remaining  on 
hand.  The  Secretary  of  the  Treasury  may  from  time  to  time  make 
such  regulations  as  he  may  find  necessary  to  insure  the  safe-keep- 
ing or  prevent  the  illegal  use  of  all  such  adhesive  stamps. 

SCHEDULE  A— Stamp  Taxes 

1.  Bonds  of  indebtedness:  Bonds,  debentures,  or  certificates  of 
indebtedness  issued  on  and  after  the  first  day  of  December,  nine- 
teen hundred  and  seventeen,  by  any  person,  corporation,  partner- 
ship, or  association,  on  each  $100  of  face  value  or  fraction  thereof, 
5  cents:  Provided,  That  every  renewal  of  the  foregoing  shall  be 
taxed  as  a  new  issue :  Provided  further,  That  when  a  bond  condi- 
tioned for  the  repayment  or  payment  of  money  is  given  in  a  penal 
sum  greater  than  the  debt  secured,  the  tax  shall  be  based  upon  the 
amount  secured. 

2.  Bonds,  indemnity,  and  surety:  Bonds  for  indemnifying  any 
person,  corporation,  partnership,  or  corporation  who  shall  have  be- 
come bound  or  engaged  as  surety,  and  all  bonds  for  the  due  exe- 
cution or  performance  of  any  contract,  obligation,  or  requirement, 
or  the  duties  of  any  office  or  position,  and  to  account  for  money 
received  by  virtue  thereof,  and  all  other  bonds  of  any  description, 
except  such  as  may  be  required  in  legal  proceedings,  not  other- 
wise provided  for  in  this  schedule,  50  cents:  Provided,  That  where 
a  premium  is  charged  for  the  execution  of  such  bonds  the  tax  shall 
be  paid  at  the  rate  of  one  per  centum  on  each  dollar  or  fractional 
part  thereof  of  the  premium  charged:  Provided  further,  That 
policies  of  reinsurance  shall  be  exempt  from  the  tax  imposed  by 
this  subdivision. 

3.  Capital  stock,  issue:  On  each  original  issue,  whether  on 
organization  or  reorganization,  of  certificates  of  stock  by  any  asso- 
ciation, company,  or  corporation,  on  each  $100  of  face  value  or 
fraction  thereof,  5  cents:  Provided,  That  where  capital  stock  is 
issued  without  face  value,  the  tax  shall  be  5  cents  per  share,  un- 


TEXT  OP    WAR  STAMP   TAX  LAW  869 

less  the  actual  value  is  in  excess  of  $100  per  share,  in  which  case 
the  tax  shall  be  5  cents  on  each  $100  of  actual  value  or  fraction 
thereof. 

The  stamps  representing  the  tax  imposed  by  this  subdivision 
shall  be  attached  to  the  stock  books  and  not  to  the  certificates 
issued. 

4.  Capital  stock,  sales  or  transfers:  On  all  sales,  or  agreements 
to  sell,  or  memoranda  of  sales  or  deliveries  of,  or  transfers  of  legal 
title  to  shares  or  certificates  of  stock  in  any  association,  company, 
or  corporation,  whether  made  upon  or  shown  by  the  books  of  the 
association,  company,  or  corporation,  or  by  any  assignment  in  blank, 
or  by  any  delivery,  or  by  any  paper  or  agreement  or  memorandum 
or  other  evidence  of  transfer  or  sale,  whether  entitling  the  holder  in 
any  manner  to  the  benefit  of  such  stock  or  not,  on  each  $100  of  face 
value  or  fraction  thereof,  2  cents,  and  where  such  shares  of 
stock  arc  without  par  value,  the  tax  shall  be  2  cents  on  the  trans- 
fer or  sale  or  agreement  to  sell  on  each  share,  unless  the  actual 
value  thereof  is  in  excess  of  $100  per  share,  in  which  case  the  tax 
shall  be  2  cents  on  each  $100  of  actual  value  or  fraction  thereof: 
Provided,  That  it  is  not  intended  by  this  title  to  impose  a  tax 
upon  an  agreement  evidencing  a  deposit  of  stock  certificates  as 
collateral  security  for  money  loaned  thereon,  wdiich  stock  certifi- 
cates are  not  actually  sold,  nor  upon  such  stock  certificates  so  de- 
posited: Provided  further,  That  the  tax  shall  not  be  imposed  upon 
deliveries  or  transfers  to  a  broker  for  sale,  nor  upon  deliveries  or 
transfers  by  a  broker  to  a  customer  for  whom  and  upon  whose 
order  he  has  purchased  same,  but  such  deliveries  or  transfers  shall 
be  accompanied  by  a  certificate  setting  forth  the  facts:  Provided 
further,  That  in  case  of  sale  where  the  evidence  of  transfer  is 
shown  only  by  the  books  of  the  company  the  stamp  shall  be  placed 
upon  such  books;  and  where  the  change  of  ownership  is  by  trans- 
fer of  the  certificate  the  stamp  shall  be  placed  upon  the  certifi- 
cate; and  in  cases  of  an  agreement  to  sell  or  where  the  transfer  is 
by  delivery  of  the  certificate  assigned  in  blank  there  shall  be  made 
and  delivered  by  the  seller  to  the  buyer  a  bill  or  memorandum 
of  such  sale,  to  which  the  stamp  shall  be  affixed;  and  every  bill 
or  memorandum  of  sale  or  agreement  to  sell  before  mentioned 
shall  show  the  date  thereof,  the  name  of  the  seller,  the  amount  of 
the  sale,  and  the  matter  or  thing  to  which  it  refers.  Any  person 
or  persons  liable  to  pay  the  tax  as  herein  provided,  or  anyone 
who  acts  in  the  matter  as  agent  or  broker  for  such  person  or  per- 


870  HOLMES   INCOME   TAX   SUPPLEMENT 

sons  who  shall  make  any  such  sale,  or  who  shall  in  pursuance  of  any 
such  sale  deliver  any  stock  or  evidence  of  the  sale  of  any  stock 
or  bill  or  memorandum  thereof,  as  herein  required,  without  having 
the  proper  stamps  affixed  thereto  with  intent  to  evade  the  fore- 
going provisions  shall  be  deemed  guilty  of  a  misdemeanor,  and 
upon  conviction  thereof  shall  pay  a  fine  of  not  exceeding  $1,000, 
or  be  imprisoned  not  more  than  six  months,  or  both,  at  the  discre- 
tion of  the  court. 

5.  Produce,  sales  of,  on  exchange:  Upon  each  sale,  agreement 
of  sale,  or  agreement  to  sell,  including  so-called  transferred  or 
scratch  sales,  any  products  or  merchandise  at  any  exchange  or  board 
of  trade,  or  other  similar  place,  fcr  future  delivery,  for  each  $100 
in  value  of  the  merchandise  covered  by  said  sale  or  agreement  of 
sale  or  agreement  to  sell,  2  cents,  and  for  each  additional  $100  or 
fractional  part  thereof  in  excess  of  $100,  2  cents:  Provided,  That 
on  every  sale  or  agreement  of  sale  or  agreement  to  sell  as  afore- 
said  there  shall  be  made  and  delivered  by  the  seller  to  the  buyer  a 
bill,  memorandum,  agreement,  or  other  evidence  of  such  sale,  agree- 
ment of  sale,  or  agreement  to  sell,  to  which  there  shall  be  affixed 
a  lawful  stamp  or  stamps  in  value  equal  to  the  amount  of  the 
tax  on  such  sale:  Provided  further,  That  sellers  of  commodities 
described  herein,  having  paid  the  tax  provided  by  this  subdivision, 
may  transfer  such  contracts  to  a  clearing  house  corporation  or  asso- 
ciation, and  such  transfer  shall  not  be  deemed  to  be  a  sale,  or 
agreement  of  sale,  or  an  agreement  to  sell  within  the  provisions  of 
this  Act,  provided  that  such  transfer  shall  not  vest  any  beneficial 
Interest  in  such  clearing  house  association  but  shall  be  made  for 
the  sole  purpose  of  enabling  such  clearing  house  association  to 
ail  just  and  balance  the  accounts  of  the  members  of  said  clearing 
house  association  on  their  several  contracts.  And  every  such  bill, 
memorandum,  or  other  evidence  of  sale  or  agreement  to  sell  shall 
show  the  date  thereof,  the  name  of  the  seller,  the  amount  of  the 
sale,  and  the  matter  or  thing  to  which  it  refers;  and  any  person 
or  persons  liable  to  pay  the  tax  as  herein  provided,  or  anyone  who 
acts  in  the  matter  as  agent  or  broker  for  such  person  or  persons, 
who  shall  make  any  such  sale  or  agreement  of  sale,  or  agreement 
to  sell,  or  who  shall,  in  pursuance  of  any  such  sale,  agreement  of 
sale,  or  agreement  to  sell,  deliver  any  such  products  or  merchan- 
dise  without  a  bill,  memorandum,  or  other  evidence  thereof  as 
herein  required,  or  who  shall  deliver  such  bill,  memorandum,  or 
ot  liei    evidence  of  sale,  or  agreement  to  sell,  without  having  the 


TEXT  OP   WAR  STAMP   TAX   LAW  871 

proper  stamps  affixed  thereto,  with  intent  to  evade  the  foregoing 
provisions,  shall  be  deemed  guilty  of  a  misdemeanor,  and  upon 
conviction  thereof  shall  pay  a  fine  of  not  exceeding  $1,000,  or  be 
imprisoned  not  more  than  six  months,  or  both,  at  the  discretion  of 
the  court. 

That  no  bill,  memorandum,  agreement,  or  other  evidence  of 
such  sale,  or  agreement  of  sale,  or  agreement  to  sell,  in  case  of  cash 
sales  of  products  or  merchandise  for  immediate  or  prompt  deliv- 
ery which  in  good  faith  are  actually  intended  to  be  delivered  shall 
be  subject  to  this  tax. 

6.  Drafts  or  checks  payable  otherwise  than  at  sight  or  on  de- 
mand, promissory  notes,  except  bank  notes  issued  for  circula- 
tion, and  for  each  renewal  of  the  same,  for  a  sum  not  exceeding 
$100,  2  cents;  and  for  each  additional  $100  or  fractional  part 
thereof,  2  cents. 

7.  Conveyance:  Deed,  instrument,  or  writing,  whereby  any  lands, 
tenements,  or  other  realty  sold  shall  be  granted,  assigned,  trans- 
ferred or  otherwise  conveyed  to,  or  vested  in,  the  purchaser  or  pur- 
chasers, or  any  other  person  or  (persons,  by  his,  her,  or  their 
direction,  when  the  consideration  or  value  of  the  interest,  or  prop- 
erty conveyed,  exclusive  of  the  value  of  any  lien  or  encumbrance 
remaining  thereon  at  the  time  of  -ale,  exceeds  $10(>  and  does  not 
exceed  $500,  50  cent^;  and  for  each  additional  $500  or  fractional 
part  thereof  50  cents:  Provided,  That  nothing  contained  in  this 
paragraph  shall  be  so  construed  as  to  impose  a  tax  upon  any 
instrument  or  writing  given   to  secure  a  debt. 

8.  Entry  of  any  goods,  wares,  or  merchandise  at  any  custom- 
house, either  for  consumption  or  warehousing,  not  exceeding  $100 
in  value,  25  cents;  exceeding  $100  and  not  exceeding  $500  in  value, 
50  cents;  exceeding  $500  in  value,  $1. 

0.  Entry  for  the  withdrawal  of  any  goods  or  merchandise  from 
customs  bonded  warehouse,  50  cents. 

10.  Passage  ticket,  one  way  or  round  trip,  for  each  passenger, 
sold  or  issued  in  the  United  states  for  passage  by  any  vessel  to  a 
port  or  place  not  in  the  tJnited  States,  Canada,  or  Mexico,  if  cost- 
ing not.  exceeding  $30,  $1;  costing  more  than  $30  and  not  exceed- 
ing !;  costing  more  than  $G(),  $5:  Provided,  That  such  pas- 
sage  tickets,  costing  $10  or  [ess,  shall  he  exempt  from  taxation. 

11.  Proxy  for  voting  at  any  election  for  officers,  or  meeting  for 
the  transaction  of  business,  of  any  incorporated  company  or  asso- 


872  HOLMES   INCOME    TAX   SUPPLEMENT 

ciation,  except  religious,  educational,  charitable,  fraternal,  or  lit- 
erary societies,  or  public  cemeteries,  10  cents. 

12.  Power  of  attorney  granting  authority  to  do  or  perform  some 
act  for  or  in  behalf  of  the  grantor,  which  authority  is  not  other- 
wise vested  in  the  grantee,  25  cents:  Provided,  That  no  stamps 
shall  be  required  upon  any  papers  necessary  to  be  used  for  the 
collection  of  claims  from  the  United  States  or  from  any  State  for 
pensions,  back  pay,  bounty,  or  for  property  lost  in  the  military  or 
naval  service  or  upon  powers  of  attorney  required  in  bankruptcy 
cases. 

13.  Playing  cards:  Upon  every  pack  of  playing  cards  containing 
not  more  than  fifty-four  cards,  manufactured  or  imported,  and 
sold,  or  removed  for  consumption  or  sale,  after  the  passage  of  this 
Act,  a  tax  of  5  cents  per  pack  in  addition  to  the  tax  imposed 
under  existing  law. 

14.  Parcel-post  packages:  Upon  every  parcel  or  package  trans- 
ported from  one  point  in  the  United  States  to  another  by  parcel 
post  on  which  the  postage  amounts  to  25  cents  or  more,  a  tax  of  1 
cent  for  each  25  cents  or  fractional  part  thereof  charged  for  such 
transportation,  to  be  paid  by  the  consignor. 

No  such  parcel  or  package  shall  be  transported  until  a  stamp 
or  stamps  representing  the  tax  due  shall  have  been  affixed  thereto. 


INDEX 


ACCOUNTING  SYSTEM, 
of  corporations,  692. 

ACCRUALS, 

deduction  of,  705,  710. 

ACCRUED   CHARGES, 
deductions  for,  691. 

\<  I  RUED  INTEREST, 
deduction   of,   710. 

ACTUAL  RECEIPT, 
of  income,  686. 

"ACTUALLY  PAID," 
definition,  691. 

ADDITIONAL  TAX, 

corporations,  computing  on,  679. 

limited  partnership,  income  of  members  from,  672. 

non-resident  aliens  subject  to,  66.".. 

ADMINISTRATORS, 

see   Executors   and  Administrators. 

ADVANCE    PAYMENT  OF  TAX,  732. 
interest  table,   736. 

AGENTS, 

non-resident  aliens,  return  for,  66.;. 

paymenl  "f  tax  for  non-resident  aliens  by,  664. 

ALLOWANCES  TO  MINORS, 
deductions  for,  708. 

AMENDMENT   OF   RETURNS,   693. 

ANCILLARY  ADMINISTRATOR, 

return   of  income   l>v,   671. 

873 


^<  i  INDEX 

ASSOCIATIONS, 

cooperative    marketing    associations,    exempt    when,    085. 

dairy  associations,  exemption   of,  685. 

definition,  673. 

records,  duty  to  keep,  659. 

return,  duty  to  render,  659. 

statements,  duty  to  render,  059. 

BANKS, 

withholding  tax,  7  17. 

BASIS  OF  COST, 

inventory,  rule  changed   for,  694. 

BENEFICIARIES, 

see  Estates  of  Deceased  Persons;  Trust  Estates. 
return  of  distributions  by,  672. 

BILLS, 

discounts,   profits   on,   095. 

BOARD  AND  LODGING,  689. 

BONDS, 

see  Stamp  Tax. 

exempt  income  from,  699. 

issue  below  par,  deduction  for,  7!<t. 

premium,  sale  at,  704. 

BONUS, 

stock  received  as,  704. 

BONUS   AND  PROFIT   SHARING    PAYMENTS, 
deductions  for,  708. 

BUILDING   AND  LOAN  ASSOCIATIONS, 
credits  of  shareholders  ;ts  income,  703. 
exemption  of,  683. 

BUREAU  OF  INTERNAL  REVENUE, 
retroactive  effect  of  rulings.   059. 

BUSINESS  TRUST, 
as  corporation,  674. 

CAPITAL, 

invest  men)  of,  not  deductible,  706. 
treasury  stock,   proceeds  of  unle  of,  075. 


INDEX  875 

I  APITAL  STOCK, 
see  Starup  Tax. 
expenses  incurred  in  sale  of,  6 
stock  trust  certificates  as,  678, 

CAB  TRUST  CERTIFICATES, 
as  obligations,  070. 
collection  of  tax  at  source,  744. 
definition,  G7G. 

CLMETLUA'  COM  FAX  1  ES, 
exemption  of,  oi>4. 

CERTIFICATES  OF  INDEBTEDNESS, 

sou   Stamp   Tax. 

CHARITIES, 

statement  as  to  contributions  to,  form  of,  660. 

<  MILDBEN, 
see   Minors. 

I   l.liBS, 

taxable,   when,  684. 

COLLECTION  OF  TAX, 

non-resident   alien,   distraint    againsl    property,    662. 

COLLECTION  OF  TAX  AT  THL  S<>FU<  K, 
annual   list   returns,  748. 
banks,  747. 

ear  trust  certificates,  744. 
employers,  748. 
Form' 1000,  745. 

10U1,  746. 

1004,  746. 
interest  on  bonds  containing  covenants  to  pay  tax,  743. 
lessors,    748. 

monthly  list  returns,  7-1  >. 
ownership  certificates,  745. 
procedure,  741. 
substitute  certificates,  716. 
withholding  on  payment  of  bond  interest,  7 

I  i)M  MISSIONS, 

bonds,  deductions  of  payments  on,  for  sale  of,  710. 
payments  for  purchase  and  sale  of  securities,  deductions  for, 

707. 
taxable  w  iien  received,  <;'-'". 

COMMON-LAW  TRUST, 
as  corporation,  074. 


876  INDEX 

COMPENSATION, 

board  and  lodging,  689. 

living  quarters,  689. 

non-resident  aliens,  wages  paid  by  residents  to,  661. 

state  officers,  694. 

CONSTRUCTIVE  RECEIPT, 
of  income,  686. 

CONTRACTING  COMPANIES, 
inventory,  basis  for,  694. 
percentage  of  profit,  694. 

CONTRACTS, 

with  state,  694. 

CONTRIBUTIONS   TO   CHARITIES, 
computing  value  of,  660. 
form  of  statement  as  to,  660. 

CONVEYANCES, 
see  Stamp  Tax. 
deeds  of  trust,  liability  of  grantors  of,  669. 

COOPERATIVE  DAIRIES, 

exemption   of,   685. 

COOPERATIVE    MARKETING   ASSOCIATIONS, 

taxable,  when,  685. 

CORPORATIONS, 

see  Exempt  Corporations;  Insurance  Companies;  Railroads: 
Stamp  Tax;  Stock;  Treasury  Stock;  War  Excess  Profits 
Tax. 

accounting  system,   692. 

ear  trust  certificates  as  debt,  676. 

computation  of  additional  tax,  679. 

damages  recovered  by,  as  income,  70Ji. 

definition,    673. 

dissolution,  tax  after,  674. 

expenses  in   sale  of   stock,  status   of,   675. 

farming,  returns  by,  696. 

nominal  ownership  of  stock  in,  duties  in  case  of,  666. 

non-resident  aliens,  rent,  salary,  etc.,  paid  to,  661. 

outstanding  indebtedness,  what  included  in,  676. 

records,   duty   to   keep,   659. 

reorganization,   income   from,    688. 

return,  duty  to  render,  659. 

statements,  duty  to  render,  659. 

stock  exchanged  for  property,  how  valued,  687. 

stock  trust  certificates,  status  of,  678. 

trustees   under  car   trust  certificates   are  not,   676. 


COST, 

inventory,  basis  for,  696. 

CREDITS, 

deductions,  what  allowed  as,  691. 

CROP  BASIS, 

deductions  on,  696. 

<  IMULATION   OF    CHARGES, 
prohibited,   692. 

CURRENT  EARNINGS, 

expenses  charged  against,  692. 

DAMAGES, 

amount  recovered  as  income,   703. 

judgment,   recovered   under,    deduction   for,    713. 

DEBTS,  DEDUCTION  FOR  WORTHLESS,  712. 

DECEDENT'S  ESTATE, 

see  Estates  of  Deceased  Persons. 

DEDUCTIONS, 

accrued  charges,  691. 

accrued  interest,  705,  710. 

"actually  paid"  defined,  691. 

allowances  to  minor  children,  708. 

bonds  issued  below  par,  710. 

bonus   and   profit   sharing   payments,   708. 

business  expenses,  706. 

car  trust  certificates,  676. 

commissions  on  purchase  and  sale  of  securities,  707,  710. 

contributions  to  charities,  stating  details  as  to,  660. 

cost  of  drawings,  models  and  patterns,  714. 

credits,  what  constitute,   691. 

cumulation  prohibited,  692. 

damages,  payments  of,  713. 

deferred  dividends  on  insurance  policies  not  allowed  as,  680. 

deficit  not  carried  forward,  6!':.'. 

depletion  of  oil  and  gas  deposits  as,  718. 

depreciation    as,    716. 

destruction   or  disappearance  of  property,   712. 

equipment  notes  issued  below  par,  71 0. 

expenses, 

maintenance  of  cemetery  company,  684. 

selling  capital    stock   not,   C7."i. 

when  not  carried  forward,  692. 
farming  corporations,  696. 
foreign  insurance  companies,  681. 


878  INDEX 

DEDUCTIONS— Cont. 

investment  of  capital  not  deductible,  706. 

judgments,  loss  by,  713. 

life  insurance  premiums  on  policies  on  officers  and  employees, 

708. 
losses,  710. 

not  incurred  in  trade,  660. 
mines,  depletion  of,  724. 
municipal  warrants  not  collectible,  689. 
non-resident  aliens,  663.   ■ 

failing  to  make  returns  not  entitled  to,  663. 

payments  by  residents  to,  661. 

when  not  entitled  to,   662. 
obsolescence,  714. 

orchards,  payments  for  development,  710. 
"paid"  denned,  691. 

pension  fund,  contributions  to,  not  deductible,  710. 
previous  year's  charges  not  deducted,  692. 
ranches,  payments  for  development  of,  710. 
rent  for  residential  property,  707. 
trading  stamps,  redemption  of,  707. 
traveling  expenses,  693. 
voluntary  destruction  of  property,  705. 
worthless  debts,  712. 

DEEDS, 

see  Stamp  Tax. 

DEED   OF   TEUST, 

liability  of  grantor,  669. 

DEFEKEED  DIVIDEND  POLICIES, 

included  in  gross  income  of  insurer,  680. 

DEFICIT, 

carrying  forward  prohibited,  692. 

DEMOLITION  OF  PEOPEETY  VOLUNTAEILY, 
deduction,  when  allowed,  705. 

DEPLETION  OF  MINES, 
deduction  for,  724,  725. 
deduction  of  allowance  for,  730. 
invested  capital,  lessee's  computation  of,  729. 
market  value,  date  of  ascertaining,  726. 
original  cost  basis,  when  used,  728. 
records  to  be  kept,  727. 
valuations,  725. 

DEPLETION  OF  OTL  AND  CAS  DEPOSITS, 

additional  depreciation  for  machinery,  etc.,  722. 


INDEX  879 

DEPLETION  UF  OIL  AND  GAS  DEPOSITS— Cont. 
allowance  for,  718. 
estimate  of  probable  resources,  720. 
statement  required,  723. 
uncertain    resources,   721. 

DEPOSITS, 

of  foreign  governments,  Interest  on,  682. 

l'KI'RECTATION, 

diversion  of  fund,  717. 
entry   on   books,    716. 
merchandise,  deduction  for,  7  Mi. 
rate  of,  716. 
trust  estates,  670. 

DISCOUNTS, 

bank,  profits  of,  695. 

DISSOLUTION   OF    CORPORATION, 

tax  after,  674. 

DISTRAINT, 

non-resident   alien's  property   subject   to,   662. 

DISTRIBUTEES, 

liability  for  tax  on  estate,  <>08. 

DISTRIBUTION  OF  INCOME, 
see  Income, 
beneficiaries, 

returns  by,  672. 

status  of  payments  to,  672. 

DIVERSION    OF    DEPRECIATION    FUND,    717. 

DIVIDENDS, 

deferred  dividend  policies,  status  of,  680. 

exempt   income,  received   from,  600. 

Federal  Reserve  brinks,  tax  on  dividend  of,  686. 

municipal    bonds,    interest   on,   699. 

nominal  owners   of  stock,  duties  of,  665. 

noil  resident    alien    nominal    owner   of  stock,   tax   where,    <!<><>. 

paymenl   in   securities,  700. 

presumed  from  most  recent   profits  or  surplus,  698. 

profits    or    surplus   of    prior    years,    inclusion    of,    697. 

reserves  for  depreciation  or  depletion  not  surplus,  700. 

-^tate  bonds,  interest  from,  699. 

stock  dividends,  700. 

stock  dividends  from   revaluation   of  assets,   702. 

United  States  bonds,  interest  on,  600. 


880  INDEX 

DRAFTS, 

see  Stamp  Tax. 

DRAWINGS,  COST  OF,  714. 

ESTATES  OF  DECEASED  PERSONS, 
see   Executors   and   Administrators, 
distributees,  liability  of,  668. 
income,   provisions   as   to   return   of,    671. 
income  received  during  settlement,  tax  on,  670. 
liability  attaching  to  estate,  668. 
life  insurance  policies,  proceeds  of,  as  income,  669. 
undistributed    income,    effect    of    reporting,    671. 

EXCESS  PAYMENT  OF  TAX,  737. 

EXCESS  PROFITS  TAX, 

see  War  Excess  Profits  Tax. 

EXCHANGE  OF  PROPERTY  FOR  STOCK, 
value,   ascertainment   of,   687. 

EXECUTORS  AND  ADMINISTRATOES, 
ancillary   administrator,  return   by,   671. 
are  fiduciaries,  667. 
duties  and  liabilities,  668. 
exemptions    claimed    by,    668. 
income  of  trust  estate,  tax  on,  669. 
income,  return  of,  by,  671. 

life  insurance  policies  payable  to  estate,  proceeds  of,  as  in- 
come, 669. 
payment  to  beneficiaries  as  distribution  of  income,  670. 
personal  liability,   668. 
return  of  income  received  during  settlement  of  estate,  670. 

EXEMPT    CORPORATIONS, 

building  and  loan  associations,  683. 

cemetery  companies,  684. 

clubs,  taxable  when,  684. 

cooperative  dairies,  685. 

Federal  Reserve  bank  dividends  taxed,  686. 

proof  of  right  to  exemption,  683. 

EXEMPT  INCOME, 

dividends  from,   699. 
municipal  bonds,  interest  on,  699. 
omission  from  return,  691. 
state  bonds,  interest  on,  699. 

EXEMPT  SECURITIES, 

purchase  price  not  outstanding  indebtedness,  676. 


INDEX  881 


EXEMPTIONS, 

executors  and  administrators,  claim  by,  668. 

EXPENSE  OF  MAINTENANCE, 

deduction,  in  case  of  cemetery  company,  684. 

EXPENSES, 

capital  stock,  sale  of,  675. 
carrying  forward,  when  not  allowed,  692. 
current  earnings,  charged  against,  692. 
materials  used  and  on  hand  as,  706. 

FARMERS, 

orchards  and  ranches,  expenditures  on,  710. 

FARMING  CORPORATIONS, 
returns  by,  696. 

FEDERAL  RESERVE  BANKS, 
dividends  taxable,  686. 

FIDUCIARIES, 

see  Executors  and  Administrators, 
definition  of,  667. 

income,  when  return  of,  required,  671. 
return  of  annual  net  income,  732. 

FISCAL  YEAR, 

determining  period  for  computing  tax,  67M. 
partnership,  designation  by,  673. 

FOREIGN   CORPORATIONS, 

see  Foreign  Insurance  Companies, 
collection  of  tax  at  source,  against,  682. 
return  of  net  income,  681. 
taxable  when,  681. 

FOREIGN  GOVERNMENTS,  682. 

FOREIGN  INSURANCE  COMPANIES, 
gross   incomes,    681. 

FRAUDULENT  RETURNS,  739. 

GAS  DEPOSITS, 

depletion  of,  718. 

GIFTS, 

see  Contributions  to  Charities. 


882  INDEX 

GROSS  INCOME, 

expenses,  charging  of,  692. 
foreign   insurance    companies,    681. 
insurance  companies,  680. 

maintenance  fund  of  cemetery  company   not   deducted   from, 
684. 

Gl  ARDIANS, 

parent  is  natural  guardian,  659. 

HUSBAND  AND  WIFE, 

filing  return,   731. 

INCOME, 

see  Gross  Income, 
bank  discounts,  calculation   of,  695. 
board  and  lodging,  689, 

building  and  loan  associations,  credits  of  shareholders  in,  703. 
contracting  companies,  694. 
damages  recovered  as,  703. 

decedent's  estate,  taxation  of  income  received  during  settle- 
ment of,  670. 
distributions  to  beneficiaries  of  trust  estates,  672. 
exempt  securities,  when  interest  from,  not  returned  as,  691. 
farming  corporations,  696. 
fiduciaries,  when  return  by,  required,  671. 
instalment  payments,  704. 

life  insurance  policies  payable  to  estate,  proceeds  of,  669. 
living  quarters,  689. 
municipal  obligations,  interest  on,  697. 
municipal  warrants,  689. 

payments  to  beneficiaries  of  trust  estates,  670. 
per  diem  allowance,  693. 
premium  on  sale  of  bond,  704. 
receipt  of,  actual  or  constructive,  686. 
state,  proceeds  of  contract  with,  694. 
taxable  in  year  when  received,   690. 
treasury  stock,  proceeds  of  sale  of,  675. 
trust  estate,  tax  on,  669. 

I  \  I  >EBTEDNESS, 

outstanding,  of  corporation,  676. 

INDEMNITY  BONDS, 
see  Stamp  Tax. 

INFORMATION  AT  THE  SOURCE, 

collection  of  foreign  payments,  71 1 . 
income,  gains  and   profits,  739. 
procedure  as  to  payment,  740. 
return  of,  740. 


INDEX  883 

tNSTALMENT  PAYMENTS,  704. 
income  when,  704. 

INSURANCE    COMPANIES, 

see  Foreign  Insurance  Companies. 

as  corporations,  673. 

eopy  of  report  made  state,  duly  to  furnish,  680. 

dividends    on    deferred    dividend    policies,    inclusion   of,    680. 

gross  income,  680. 

returns  by,  form  and  basis  of,  679. 

INTEREST, 

accruals,  deduction  of,  705,  710. 
carrying  forward,  when  not  allowed,  692. 
exempt   securities,   omission    of    interest    on,   691. 
insurance  companies'  gross  income,  computation  of,  680. 
municipal  obligations,  697. 
table,  736. 

INVENTORIES, 

cost  or  market  value  basis  for,  694. 
how   taken,   686. 

INVESTED  CAPITAL, 

see  War  Excess  Profits  Tax. 

lessee  of  mine,  computation  by,  729. 

INVESTMENT  OFCAPITAL,  706. 

ISSUE  BELOW  PAR, 

bonds  and  notes,  deductions  for,  710. 

ISSUE  OF  STOCK, 
see  Stamp  Tax. 

JOINT-STOCK  COMPANY, 
definition,  673. 

JUDGMENTS, 

deductions  for,   713. 

LEASED  LINE  CERTIFICATES,  678. 

LEASES, 

see  Railroads. 

LIEN  FOR  UNPAID  TAXES,  738. 

LIFE  INSURANCE  POLICIES, 

proceeds  as  income  where  payable  to  estate,  669. 
F.  I.  Tax  Supp— 15 


8S4  INDEX 

LIFE  INSURANCE  PREMIUMS, 

policies  on  lives  of  officers  and  employees,  etc.,  7(J8. 

LIMITATION,  WAIVER  OF,  738. 

LIMITED  PARTNERSHIPS, 
see  also  Partnership, 
definition,  672. 
return  required  of,  672. 

LIVING  QUARTERS,  689. 

LODGING,  689. 

LOSSES, 

deductions  for,  710. 

LOSSES  NOT  INCURRED  IN  TRADE, 

citizens  and  residents,  deductions  by,  660. 

MACHINERY, 

oil  and  gas  machinery,  depreciation  of,  722. 

MAINTENANCE  FUND, 

deduction  by   cemetery   company   not   allowed,  684. 

MAJORITY, 

date  of  attaining,  659. 

MARKET  VALUE, 

inventory,  basis  for,   694. 

MATERIALS, 

used  and  on  hand,  expenditures  for,  706. 

MERCHANDISE, 

depreciation  of,  716. 

MINES, 

depletion  of,  724. 

MINORS, 

allowances  to,  deductions  for,  708. 

appropriation   of  income  by  parent,  presumption  as  to,  659. 

becoming  of  age,  659. 

income,  return  by  parents  as  to,  659. 

parent  natural  guardian  of,  659. 

MODELS,  COST  OF,  714. 

M  1  'NICIPAL  WARRANTS, 
:is  income,  689. 


INDEX 


MUNICIPALITIES, 

bonds  issued  by,  interest  on,  699. 
interest   on   obligations   of,   697. 

NET   LOSSES, 

partners,  division  among,  67">. 

NOMINAL  CAPITAL, 

see  War  Excess  Profits   Tax. 

NOMINAL  STOCKHOLDERS, 
non-resident  alien  as,  666. 
non-resident  alien's  property  held  by,  tax  on,  665. 

\<>N-RES1DENT  ALIENS, 

additional  tax,  subject  to,  66.".. 

agents,  making  of  returns  by,  663. 

commissions  paid  by  residents  to,  66 1 . 

deductions  on  payments  to,  661. 

distraint  against  property  of,  662. 

nominal  ownership  of  stock  by,  666. 

normal   tax,   liability  to,   663. 

payment  of  tax  by  agent  of,  664. 

penalty  for  failure  to  make  return  in  time,  662. 

profits  on  sale  of  stock  by,  return  of,  661. 

record  owners  of  property  of,  duties  and  Liabilities  of,  665. 

refund  of  withheld  tax  to,  662. 

rents  paid  by  residents  to,  661. 

return  of  annual  net  income  by,  6(i2. 

salaries  paid  by  residents  to,  661. 

wages  paid  by  residents  to,  661. 

withholding  tax  on  payments  to,  661. 

NORMAL  TAX, 

aon-residenl    aliens  subject   to,  *»«>"*. . 

NOTES, 

see   Stamp  Tax. 

bank  discounts,  calculation  of,  695. 

OATH, 

statements  and  returns  to  be  under,  659. 

nr.SOLESCEXOE.  711. 

(ML  DEPOSITS, 
depletion  of,  718. 

OPERATION,  EXPENSE  OF, 

sale  id*  capital  stoek,  cost  <>t',  nol  classed  :i-,  675. 


886  INDEX 

ORCHARDS, 

payments  for  development  of,  not  deductible,  710. 

ORIGINAL  COST  BASIS, 

depletion   of  mines,  ascertainment  of,  728. 

OUTSTANDING  INDEBTEDNESS, 
of  corporation,  676. 

OWNERSHIP  CERTIFICATES, 

collection  of  tax  at  the  source,  745. 

"PAID," 

definition,  691. 

PARCELS  POST, 
see  Stamp  Tax. 

PARENTS, 

appropriation  of  minor  child's  income,  presumption  as  to,  659. 

guardian  of  minor  child,  659. 

minor  child's  income,  return  of,  659. 

PARTNERSHIPS, 

see  also  Limited  Partnerships, 
fiscal  year,  designation  of,  673. 
net  losses,  division  and  return  of,  673. 
records,  duty  to  keep,  659. 
return,  duty  to  render,  659. 
statements,  duty  to  render,  659. 

PATTERNS,   COST  OF,  714. 

PAYMENT  OF  TAX, 

advance  payment,  732. 

agents  of  non-resident  aliens,  664. 

delay,  penalty  for,  739. 

excess  payment,  737. 

information  at  the  source,  in  case  of,  740. 

interest  table,  736. 

manner  of,  737. 

non-resident  aliens,  664. 

PENALTIES, 

attaching  to  person  and  to  income,  when,  738. 

delay  in  payment  of  tax,  739. 

fraudulent  return,  739. 

non-resident  aliens  failing  to  make  return  in  time,  662. 

reasonable  cause  for  excuse  from,  738. 

PENSION  FUND, 

deduction  for  contributions  to,  not  allowed,  710. 


INDEX  887 

PERCENTAGE  OF  PROFIT,  694. 

PER  DIEM  ALLOWANCE,  693. 

PERSONAL  SERVICES, 

per  diem  allowance,  693. 

POLITICAL   SUBDIVISIONS    OF    STATE,    697. 

POWERS  OF  ATTORNEY, 
see  Stamp  Tax. 

PREMIUM,  BONDS  SOLD  AT,   704. 

PREMIUMS, 

life  insurance  policies  on  lives  of  officers,  employees,  etc.,  708. 

PREWAR  PERIOD, 

see  War  Excess  Profits  Tax. 

PROFIT    SHARING   PAYMENTS, 
deductions  for,  708. 

PROFITS, 

calculation  on  contract,  694. 

non-resident  aliens,  on  sale  of  stock  by,  661. 

prior  years,  profits  in,  697. 

PROMISSORY  NOTES, 
see  Stamp  Tax. 

PROXIES, 

see  Stamp  Tax. 

RAILROADS, 

car  trust  certificates  as  debts  of,  676. 
leased  lines, 

certificates  issued  by  lessee  of,  678. 

deduction  of  debt  of,  677. 

receipts  from,  677. 

return   by  lessor  of,   678. 
stock  trust  certificates,  status  of,  678. 

RANCHES, 

payment  for  development  of,  710. 

READJUSTMENT  OF  RULINGS,  659. 

REAL   ESTATE, 

deed  of  trust,  liability  of  grantor  of,  669. 


88b  INDEX 

RECEIPT,      . 

income,  actual  or  constructive,  686. 

RECEIVEES, 

duty  to  account  for  tax  on  principal,  669. 

RECORD  OWNERS  OP  PROPERTY, 

non-resident  alien  nominal  owner  of  stock,  tax  where,  660. 
non-resident  alien's  property,  payment  of  tax  ou,  605. 

R  E<  ORDS, 

duty  of  persons,  partnerships,  corporations,  etc.,  to  keep,  659. 

REDEMPTION  OP  TRADING  STAMPS, 

deductions  for,   707. 

REFUND   OF   TAXES, 

non-resident  aliens,  tax  withheld  at  source  against,  GG2. 

REGULATIONS  No.  41, 

see  War  Excess  Profits  Tax. 

RENT, 

non-resident  aliens,  residents   paying  to.  661. 
of  residential  property  as  deduction,  707. 

REORGANIZATION  OF  CORPORATIONS, 

income,  determining,  688. 

KKSERVES  FOR  DEPRECIATION,  700. 

RESIDENCE, 

deduction  of  rent,  707. 

RETROACTIVE  RULINGS,  659. 

RETURN, 

collection  of  tax  at  the  source,  748. 

duty   of   persons,   partnerships,   corporations   and    associations 
to  render,  659. 

RETURN  OF  ANNUAL  NET  INCOME, 

agents  of  non-resident  aliens,  duties  of,  663. 

amendment  of,  693. 

ancillary  administrator,   duties  of,  671 . 

beneficiaries  of  trust  estates,  return  of  distributions  by,  672. 

complete  return  annually,  692. 

contributions   to  charities,   stating   details  as  to,   660. 

discounts  by  bank,  695. 

dissolved  corporation  making,  674. 

exempt  securities  omitted,  691. 


INDEX 

RETURN  OF  ANNUAL  NET  INCOME— Cont. 
farming  corporations,  696. 
fiduciaries  making,  732. 
filed,  by  whom,  730. 
foreign  corporations,  681. 
foreign  insurance  companies,  681. 
fraudulent  return,  739. 
husband  filing,  731. 

income  received  during  settlement  of  decedenl  's  estate,  670, 
insurance  companies,  680. 

form  of,  679. 
interest  from  exempt  securities  omitted,   691. 
limited  partnerships,  duty  of,  672. 
minor's  income,  parents  return  as  to,  659. 
nominal  owners  of  stock,  duty  of,  665. 

non-resident  alien  holding  nominal  ownership  of  stock,  666. 
non-resident  aliens,  duty  of,  662. 
oath,  necessity,  659. 

penalty  for  failure  to  make  in  time,  non-resident  alien  sub- 
ject to,  662. 
profits  of  non-resident  alien  selling  stock,  661. 
time  of  filing,  731. 

trust  estates,  return  by  fiduciaries  as  to,  671. 
verification  abroad,  731. 
wife  filing,  731. 

REVALUATION  OF  ASSETS, 
dividends  from,  702. 

EIGHTS  TO  SUBSCRIBE  TO  STOCK, 
see  Stamp  Tax. 

RULINGS  AND  REGULATIONS, 

approval,  effective  from  date  of,  659. 
effective,  when  to  become,  659. 
readjustment  of,  659. 
retroactive  effect  of,  659. 

SALARIES, 

non-resident   aliens,  payment  by  residents  to,  661. 
taxable  in  year  received,  690. 

SALE  OF, 

capital  stock,  expenses  incurred  in,  675. 

stock  by  non-resident  alien,  return  of  profit  on,  661. 

treasury  stock,  tax  on,  675. 

SALE  OF  STOCK, 
see  Stamp  Tax. 


890  INDEX 

SALES  DURING  YEAR, 

instalment  sales  as,  704. 

SECURITIES, 

see  Bonds;  Promissory  Notes;  Stamp  Tax. 
exempt,   not    outstanding  indebtedness,   676. 

SOURCE, 

see  Collection  of  Tax  At  The  Source;  Information  At  The 

Source, 
definition,   681. 

SOURCES  WITHIN   UNITED  STATES, 

non-resident  aliens,  payment  by  residents   to,  661. 
sale  of  stock  by  non-resident  alien,  661. 

STAMP  TAX, 
affixing, 

see  stamps,  infra. 
agents,  substitute  returns  by,  844. 
boards  of  trade,  returns  by  members,  850. 
bonds, 

corporation  having  taxing  power,  issued  by,  832. 

District  of  Columbia,  issued  by,  832. 

foreign  government,  issued  by,  832. 

municipality,  issued  by,  832. 

mutual  ditch  and  irrigation  companies,  823. 

powers  of  attorney  for  transfer  of,  825.  , 

states,  issued  by,  832. 

territory,  issued  by,  832. 

United  States,  issued  by,  832. 
bonds  of  indebtedness,  80i. 

affixing  of  stamps,  803. 

bonds  given  in  penal  sum,  802. 

certificates    of    deposit,    803. 

date   of  issue,  803. 

"gold  notes,"  802. 

penal  sum,  bonds  given  in,  802. 

renewal,  802. 

transfer,  effect  of,  802. 
brokers, 

see  stockbrokers,  infra. 
building  and  loan  associations, 

bonds,  806. 

stocks,  806. 
cancellation  of  stamps, 

on  stock  transfers,   814. 

requirements  as  to,  836. 
capital  stock, 

agreement  to  sell,  813. 

assignment  in  blank,  813. 


INDEX  891 

STAMP  TAX— Cont. 

bill  of  sale,  813. 

brokers,    certificate    by,    809. 

change  of  corporation  name,  issue  on,  807. 

clearing  house,  transfer  to,  810. 

collateral,  deposit  as,  809. 

contract    to    issue,    807. 

stamps  on,  806. 
deposit  of  certificate  as  collateral  security,  809. 
exchange  of  certificates,  807. 
foreign  corporations, 

certificates  in,  807. 

transfer  of  stock  in,  814. 
formal  transfer  without  change  of  title,  810. 
interim  certificates,  807. 
issue,  rate  on,  806. 
loan,  811. 

memorandum  of  sales,  813. 
mutual  ditch  and  irrigation  companies,  823. 
one  payment  of  tax,  813. 
original  issue   of  certificates,  807. 
powers  of  attorney  for  transier  of,  825. 
rate  on  issue,  806. 
record  of  transfers,  839. 
redemption  by  issuing  corporation,  811. 
registration  of  brokers  and  transfer  agents,  815. 
rights    to    subscribe,    835. 
sales, 

rate  on,  808. 

records  by  brokers  of,  839. 

returns  by  persons  making,  S40. 
shares  without  par  value, 

issue  of,  808. 

transfer  of,  812. 
stamps, 

on    contract   to   issue,    806. 

transfers,  affixing  and  cancellation  on,  814. 

where   to   affix,   807. 
subscription  rights,  transfer  of,  812. 
subscription  f"  rants,  transfer  of,  812. 
temporary  certificates,  807. 
title  passing  prior  to  incidence  of  tax,  812. 
title,  transfer  not  affecting,  810. 

before  issue   of  certificate,  812. 
by  delivery,  813. 
Tate  on,      808. 
records  by  brokers  of,  839. 
to  clearinghouse,  810. 
to  or  bv  broker,  809. 
transfer   of 'title   before   incidence   of  tax,    812. 


892  INDEX 

STAMP  TAX— Cont. 

voting  trust  certificates,  transfer  of,  814. 
certificates,  816. 

collector  or  other  officer  to  keep,  847. 
certificates  of  deposit  not  taxable,  when,  815. 
certificates  of   indebtedness, 

see  bonds  of  indebtedness,  supra. 
certificates  of  stock, 

see  capital  stock,  supra. 
checks,   816. 

payable  otherwise  than  at  sight  or  on  demand,  830. 
clearing  houses, 

certificates  of  registry,  838. 

failure  to  make  returns,  852. 

records  to  be  kept  by,  839,  849. 

registration  of,  837. 

reports  by,   840. 

returns  by,  842. 
contracts,  816. 
contracts  to  convey,  816. 
conveyances,  816. 

consideration,  ascertainment  of,  819. 

contracts  to  convey,  816. 

county,  deed  from,  819. 

court  officers,  deeds  by,  819. 

foreign  country,  property  in,  818. 

gift,  deed  of,  817. 

incumbrance  at  time  of  sale,  820. 

leases,  819. 

mining  deeds,  818. 

municipality,  deed  from,  819. 

options,  819. 

political  subdivision,  deed  from,  819. 

quit-claim  deeds,  817. 

releases,  817. 

sale,  necessity  of,  816. 

stamps,  affixing  of,  821. 

state,  deed  from,  819. 

town,  deed  from,  819. 

trust  deeds,  817. 

value,  how  determined,   819. 
debentures, 

see  bonds  of  indebtedness, 
deeds,  816. 
drafts,  816,  822. 

payable  otherwise  than  at  sight  or  on  demand,  830. 
entry  for  withdrawals  from  customs  bonded  warehouse,  822. 
entry  of  goods,  etc.,  at  custom  house,  822. 
failure  to  make  returns,  852. 
futures,  registration  of  dealers  in,  846. 
gift,  deed  of,  817. 


im>i  s  893 

STAMP  TAX— (Jont. 
guaranty  bonds, 

see  indemnity  and  surety  I Is,  infra. 

"incidence  of  tax'1  defined,  801. 
indemnity  ami   surety   bonds, 

counties,  bonds  given  by,  805. 

defined,  804. 

delivery  before  incidence  of  tax,  805. 

Federal  Government,  given  to,  805. 

foreign  countries,  issued  in,  805. 

license,  bond   given   state  for,  805. 

political  subdivisions  of  state;  given  by  and  to,  804,  805. 

required  in  legal  proceedings,  8U4. 

states,  given  by  and  to,  804,  805. 

townships,  bonds  given  by,  805. 
insurance  policies,  assignments  of,  825. 
interim  certificates, 

see  capital  stock,  supra. 
judgment  notes,  820. 
leases,   819. 

loans,  applications  for,  835. 
mining  deeds,  818. 
mortgages,  823. 

mutual  ditch  and  irrigation  companies,  bonds  and  stock,  823. 
options,  819. 
original  issue  of  stock, 

capital  stock,  supra. 
parcel  post  packages,  823. 
passenger  tickets,   824. 
penalties,  854. 
playing  cards,  825. 
powers    of  attorney,   825. 

assignment  of  insurance  policy,  825. 

bonds,  for  transfer  of,  825. 

corporation,  granted  by,  82G. 

foreign    country,    executed   in,    826. 

formal   powers,  825. 

judgment  notes,  826. 

poll   taxes,  for  paymenl  of,  825. 

sale,  power-  of,  s25. 

stump,  affixing  of,  827. 

stocks,   for  transfer  of,  825. 

produce  sales  on  exchange  or  board  of  trade,  827. 
agreements  of  sale,  827. 
clearing  house,  transfers  to,  829. 
delivery,    time    of,   828. 
future  deli  very,  sales  for,  827. 
immediate  delivery,  828. 
memorandum  of  sale,  827. 
records  by  buyers  and  sellers,  sis 
registration  ami   records.  8*29. 


894  INDEX 

STAMP  TAX— Cont. 

returns  by  members,  850. 

sales,  records  of,  848. 
promissory  notes, 

checks  or  drafts  payable  otherwise  than  at  eight  or  on 
demand,  830. 

corporation  having  taxing  power,  832. 

definition,  830. 

District  of  Columbia,  issued  by,  832. 

drafts  payable  otherwise  than  at  sight  or  on  demand,  830. 

foreign  countries,  drawn  in,  832. 

foreign  governments,  issued  by,  832. 

municipality,   issued   by,   832. 

rate  of  tax,  829. 

renewals,  832. 

stamp,  affixing  of,  833. 

state,  issued  by,  832. 

territory,  issued  by,  832. 

transfer  by  indorsement,  833. 

United  States,  issued  by,  832. 
proxies,  833. 

stamp,  affixing  of,  834. 

two  or  more  stockholders,  signed  by,  833. 
rates  of  tax, 

boards  of  trade  and  produce  exchanges,  sales  on,  827. 

bonds  of  indebtedness,  801. 

capital  stock,  sales  and  transfers,  808. 

certificates   of  stock,  issue  of,   806. 

conveyances,  816,  819. 

entries  at  custom  house,  822. 

parcel  post  packages,  823. 

passenger  tickets,  824. 

incumbered  real  estate,  820. 

powers  of  attorney,  824. 

produce  exchange,  sales  on,  827. 

promissory  notes,  829. 
records, 

buyers  to  keep,  848. 

clearing  house  to  keep,  849. 

collector  or  other  officer  to  keep,  847. 

sellers  to  keep,  848. 
registration  of  dealers  in  futures,  846. 
release,  deed  of,  817. 

returns  by  members  of  exchanges  and  boards  of  trade,  850. 
returns,  failure  to  make,  852. 
sale  of  realty,  necessity  of,  816. 
sale  of  stamps,  845,  853. 
security  agreements,  835. 
shares  without  par  value, 

see  capital  stock,  supra. 


INDEX  895 

STAMP  TAX— Cont. 
stamps, 

see  cancellation  of  stamps,  supra. 

affixing  on  bonds,  803. 

affixing  on  certificates  of  stock,  807. 

affixing  on  transfers  of  stock,  814. 

cancellation  on  stock  transfers,  814. 

contract  to  issue  stock,  806. 

conveyances,  affixing  on,  821. 

fiduciaries,  transfers  to  and  by,  811. 

loan  of  stock,  811. 

powers  of  attorney,  affixing  to,  827. 

promissory  notes,  affixing  on,  833. 

proxy,  affixing  on,  834. 

sales  of,  845,  853. 
stock, 

see  capital  stock,  supra. 
stockbrokers, 

records  to  be  kept  by,  839. 

registration  of,  815,  837. 
stock  certificates, 

see  capital  stock,  supra. 
substitute  returns  by  agents,  844. 
surety  bonds, 

see  indemnity  and  surety  bonds,  supra. 
tickets,  passenger,  823. 
transfer  agents, 

certificates  of  registry,  S38. 

records  to  be  kept  by,  839. 

registration  of,  815,  837. 

reports  by,  840. 
transfers  of  stock. 

see  capital  stock,  supra. 
trust  deed,  817. 
voting  trust  certificates,  transfer  of,  814. 

STATEMENTS. 

duty  of  individuals,  corporations,  partnerships  and  associa- 
tions   to    render,    659. 
oath,  necessity  of,  659. 

STATES. 

bonds  issued  by,  interest  on,  699. 
political  subdivisions  of,  697. 

STATE  OFFICERS,  694. 

STOCK, 

see  Stamp  Tax:  Treasury  Stock. 

bonus,  received  as,  704. 

exchange  for  property,  valuation  of,  6S7. 


896  INDEX 

STOCK— Oont. 

expenses  incurred  in  sale  of,  status  of,  675. 
non-resident  alien  selling,  return  of  profit  by,  661. 

trust  certificates,  status  of,  07s. 

STOCK  DIVIDENDS,  700. 

revaluation  of  assets,  arising  from,  702. 

STOCK  HELD  BY  NOMINAL  OWNERS, 
non-resident  alien  holding  stock,  666. 
non-resident   alien's  property,  tax  on,  665. 

STOCK  TRUST  CERTIFICATES,  678. 

s I  HST I TUTE  CERTIFICATES, 
collection  of  tax  at  source,  746. 

SURETY  BONDS, 

see  Stamp  Tax. 

SURPLUS, 

dividends  from,  inclusion  of,  697. 

reserves  for  depreciation  or  depletion   not  considered  as,  Tim. 

revaluation  of  assets,  created  by,  702. 

SURTAX, 

limited  partnership  members  subject  to,  672. 

TABLE  OF  INTEREST,  736. 

TAX  ON  EXCESS  PROFITS, 
see  War  Excess  Profits  Tax. 

TAXES, 

carrying  forward,  when  not  allowed,  692. 

TRADING  STAMPS, 

:  edemption  of,  as  deduction,  707. 

TRANSFERS  OF  STOCK, 
see  Stamp  Tax. 

TRAVELING  EXPENSES,  693. 

TREASURY  STOCK, 
definition,  675. 
sale,  when  proceeds  of,  taxed.  675. 

TRUST  ESTATES, 

beneficiaries,  returns  of  distributions  by,  672. 
depreciation,  670. 


INDEX  897 

TRUST   ESTATES     Cont. 

income,  payment  of  tax  on,  669. 

liability  of  grantors  of,  669. 

payments  to  beneficiaries  as  distribution  of  income,  670. 

undistributed  income,  effect  of  reporting,  (571. 

TRUSTEES, 

are  fiduciaries,  667. 

car  trust  certificates,  status   under,   i>7f>. 

UNITED  STATES, 

bonds,  interest  from,  (590. 

interest  on  obligations  of,  in  computing  insurance  companie3' 
gross  income,  680. 

VALUATION, 

mines,  depletion  of,  725. 

\  KRIFICATION, 

return  of  annual  net  income,  731. 
statements  and  returns,  oath  to,  659. 

VOLUNTARY  DESTRUCTION  OF  PROPERTY, 
deduction  in  case  of,  705. 

WAGES, 

see  Compensation. 

WAIVING  THREE-YEAR  LIMITATION'.  738. 

WAR  EXCESS  PROFITS  TAX, 
abatement,  claim   for, 

filed  with  return,  when,  762. 
accounting, 

defective,  781. 

surplus   not    shown,    790. 

ultra-conservative,  782. 
accounts  payable,  borrowed  money,  778. 
accounts  receivable,  tangible  property,  780. 
additions  to  capital  account, 

burden  of  proof  on  tax   payer,  when,  790. 

when  necessary  i>\   reason  of  adjustments,  784. 
adjusted  total  of  capital  and  surplus  account,  784. 
adjustments  of  book  values,  783. 
admissible  assets, 

corporations  and  partnerships,  7^4. 

individuals,    795. 
advertising,   expenditures  for.  791. 
affiliated  corporations,  799,  S00. 
agents,   797. 
Alaska,  751. 


898  INDEX 

WAR  EXCESS  PROFITS  TAX— Cont. 
amortization,    782. 
amounts   deducted  as  expense  in  income  tax  returns  cannot 

be  included  in  invested  capital,  792. 
annual  balance  sheet, 

required  from  corporations  and  partnerships,  785. 
assessment  of  tax,  800. 
assets  and  liabilities  of  individuals,  796. 
assets  not  carried  on  books  at  valuation  prescribed  by  law, 

782. 
associations,  750. 

balance  sheet,  when  required,  785. 
bills  and  accounts  receivable, 

treated  as  tangible  property,  780. 
bills  payable,  borrowed  money,  778. 

bond,  may  be  required  for  amount  of  assessment  abated,  762. 
bonds,   excluded  from  invested  capital  if  interest   is  tax- 
free,  778. 

unless  income  is  derived  from  trading  therein,  778. 
treated  as  tangible  property,  779. 

U.  S.  bonds,  although  tax-free,  may  be  included  as  in 
vested  capital,  778. 
book  of  account, 

failing  to  show  true  surplus,  790. 
individuals  not  keeping,  795. 
book  values,  adjusted,  when,  782. 
borrowed  money  and  property,  778. 

may    be    included    in    invested    capital    of    corporations, 
when,  778. 
brokers,  797. 

business,  term  defined,  751. 
business  having  nominal  capital,  796,  797. 
capital,  rule  for  computing  invested, 
corporations  and  partnerships,  782. 
individuals,  794. 
cash  paid  into  business  or  trade, 

corporations  and  partnerships,  776. 
individuals,    793. 
changes  in  invested  capital  during  year,  777. 
Class  A  income,  754. 
Class  B  income,  754. 
collection  of  tax,  800. 
commission  houses,  797. 
consolidated  returns,  800. 

constructive  capital  for  application  of  rates,  759. 
copyrights,  stock  issued  for,  783,  786. 

paid  into  trade  or  business  of  individuals,  793. 
when  part  of  a  mixed  aggregate,  787. 
corporations, 

affiliated,  returns  in  case  of,  799,  800. 
business,  income  from,  751. 


INDEX 


899 


WAR  EXCESS  PROFITS  TAX— Cont% 

deduction,    how    determined,    761. 

definition  of  term,  750. 

dissolved  in  1917  prior  to  passage  of  law,  674. 

exempt,  when,  753. 

fiscal  year,  751. 

ending  in  1917,  760. 
less  than  12  months,  deduction,  760. 
invested  capital  when  all  interest  on  indebtedness  cannot 
be  deducted  as  expense,  778. 
see  also  under  invested  capital, 
net  income  for  taxable  year,  767. 

for  prewar  period,  768. 
principal  trade  or  business  determines  rate  of  tax,  754. 
returns  required,  when,  752. 
taxes  paid  in  prewar  period,  768. 
two  or  more  owned  by  same  interests,  799,  800. 
corrections  in  balance  sheet,  when  necessary,  784. 
deduction, 

corporations,  761. 

foreign  corporations,  761. 

foreign  partnerships,  761. 

1'or  period  less  than  one  year,  760. 

how   computed,   760. 

individuals,  761. 

non-resident  aliens,  761. 

partnerships,  761. 

of  affiliated  corporations,  799,  800. 

of  representative  concerns, 

used  in  other  cases,  where,  781. 
used  when  net  income  in  prewar  period  not  ascertain- 
able, or  low,  or  none,  763. 
used  where  invested  capital  not  ascertainable,  765. 
definitions,  750. 
depletion,  allowance  for,  776. 

failure  to  provide  for,  790.^ 
depreciation,  allowance  for,  776. 
exceptional  cases   of,  782. 
failure  to  provide  for,  790. 
development  companies,  782. 
District  of  Columbia,  751. 
dividends,  term  defined,  752. 

deducible  from  net  income,     . 
corporations,  767. 
individuals.   772. 
partnerships,  769. 
on  stock  of  foreign  corporations,  766. 
"domestic,"  term  defined,  750. 
earnings  of  taxable  year,  788. 

equipment,  expenditures  for,  charged  to  expense,  may  be  re- 
stored to  capital  account,  when,  790,  792. 
F.  I.  Tax  Supp.— 16 


1)00  INDEX 

WAR  EXCESS  PROFITS  TAX— Cont. 
exempt  income,  766. 
exemptions,  753. 

expense,  amounts  charged  to,  may  be  restored  to  capital  ac- 
count, when,  790,  792. 
expenses, 

failure  to  provide  for,  790. 
fees,  754,  771. 
first  taxable  year,  751. 

fiscal  year  ending  in  1917,  760. 
fiscal  year,  751. 

computation  of  tax  for  year  ending  in  1917,  760. 
fixtures,  expenditures  for,  charged  to  expense,  may  be  restored 

to  capital  account,  when,  791,  792. 
"foreign,"  term  defined,  750. 
foreign  corporations, 

deduction,  how  determined,  760. 

invested  capital  of,  780. 

net  income  of,   766. 

returns  required  when,  752. 

when  invested  capital  mav  be  fixed  by  Commissioned, 
781. 
foreign  partnerships, 

deduction,  how  computed,  761. 

invested  capital  of,  780. 

net  income  of,  766. 

returns  required,  when,  753. 

when  invested  capital  may  be  fixed  by  Commissioner, 
781. 
franchises, 

amounts  expended  for,  791. 
furniture,  expenditures  for,  charged  to  expense,  may  be  re- 
stored to  capital  account,  when,  791,  792. 
gains  from  sale  of  assets,  782. 
gift  of  tangible  property  to  corporations,  789. 
good  will, 

amounts  expended  for,  791. 

paid  into  trade  or  business  of  individuals,  793. 

stock  issued  for,  783,  786. 

when  part  of  a  mixed  aggregate,  787. 
Hawaii,  751. 

holding  and  subsidiary  corporations,  799,  800. 
illustrations,   computing  tax, 

computation   of  tax  in   case   of  individuals   engaged  m 
various  businesses,  773,  774. 

when  deduction  does  not  exceed  15%  of  capital,  755. 

when  deduction  exceeds  15%  of  capital,  757. 
inadmissible  assets,  778. 

set  off  against  borrowed  money,  784. 
indebtedness,  778. 


INDIA  901 

WAB   EXCESS   PROFITS  TAX— Cont. 
individuals, 

contributions,  deductible  when,  77:;. 

deduction,  how  determined,  761. 

deduction  of  $6,000  allowed  from  each  class  of  income, 
773. 

engaged  in  two  or  more  businesses,  invested  capital,  796. 

exempt,  when,  753. 

gains  or  profits  from  isolated  transactions,  7~>l!. 

income  classified  for  purpose  of  tax,  754. 

income  of  same  class  from  all  sources  added  together,  772. 

invested   capital   of,   793. 

investment-;,   income  from,  7;">2. 

net  income  in  case  of  no  invested  capital,  771. 

not  keeping  books  of  account,  795. 

returns   required,   when,    753. 

salaries,  allowance  for,  out  of  bu.siness  income,  771. 

trade  or  business,  defined,  751. 

vocations,   income   from,    taxable,   7'<-. 
insurance  companies, 

invested  capital  of,  792. 
intangible  property,  779. 

amounts  expended  for,  791. 

limit  of  value  when  paid  for  in  stock,  783. 

stock  issued  for,  783,  786. 

value  of,  when  paid  for  in  cash  or  tangible  property.  7ss. 

valuation   of,   785. 

valuation  of,  paid  into  trade  or  business  of   individuals, 
794. 

when  part  of  a  mixed  aggregate,  787. 
invested  capital, 

average,  how  ascertained,  777. 

corporations,  782. 

general  provisions,  776. 

how  fixed  when  not  ascertainable,  759. 

individuals,  rule  for  computing,  794. 

items  not  allowed  to  be  included,  778. 

may  be  fixed  by  Commissioner,  when,  781. 

not   determinable,  assessment    in  cases  where,  764. 

of  affiliated  corporations,  799,  800. 

partnerships,  782. 

when  Beriously  disproportionate  to  taxable  income,  782. 
January  2,  101",  business  reorganized  on  or  after, 

deduction    depends    on    income    and    invested    capital    of 
predecessor  for  prewar  period,  762. 

invested  capital  in  case  of,  780. 
January   1,   1911, 

value  of  property   on,   785. 
and  after,  786. 
in  case  of   individuals,   793. 
joint-stock  companies,  750. 


902  INDEX 

WAR  EXCESS  PEOFITS  TAX— Cont. 
leaseholds, 

treated  as  tangible  property,  780. 
limited  partnerships  held  to  be  taxable  as  corporations,  750. 
losses,   failure  to  provide  for,   790. 
losses  of  surplus  and  undivided  profits,  776. 
March  3,  1917,  reorganization  after, 

invested  capital  in  case  of,  780,  786. 
married  woman  may  make  separate  return,  798. 
monthly  average  of  invested  capital,  777. 
munition  plants,  amortization  of,  782. 
mutual  insurance  companies,  792. 
net  income,  766. 

abnormally  large  in  taxable  year,  782. 

classification,    754. 

of  affiliated  corporations,  799,  800. 

of  corporations,  767. 

of  individuals,  771. 

of   partnerships,    769. 

prewar  period,  762. 
nominal  capital,  796,  797. 

income  from,   754. 
non-resident  aliens, 

deduction,  how  determined,  761. 

invested  capital  of,  780. 

net  income  of,  766. 

returns  required,  when,  753. 

when  invested  capital  may  be  fixed  by  Commissioner, 
781. 
notes  and  other  evidences  of  indebtedness, 

treated  as  tangible  property,  780. 
obsolescence,  782. 

allowance  for,  776. 

failure  to   provide  for,   790. 
paid  in  capital,  782. 

parent  and  subsidiary  corporations,  799,  800. 
partners, 

not  taxable  on  share  of  partnership  profits,  775. 

taxable  on  salary  from  partnership,  775. 
partnerships, 

deduction,  how  determined,  760. 

exempt,  when,  753. 

fiscal  year,  751. 

interest  on  loans  made  by  partners,  771. 

net  income  for  taxable  year,  769. 
for  prewar  period,  769. 

principal  trade  or  business  determines  rate  of  tax,  754. 

profits  of,  not  taxable  to  partners,  775. 

returns  required,  when,  753. 

salaries  paid  to  partners,  770. 


INDEX  903 

WAR  EXCESS  PROFITS  TAX— Cont. 
patents, 

paid  in  to  trade  or  business  of  individuals,  793. 

stock  issued  for,  783,  786. 

when  part  of  a  mixed  aggregate,  787. 
patterns,  expenditures  for,  charged  to  expense,  may  be  re- 
stored to  capital  account,  when,  790,  792. 
plant  expenditures  charged    to  expense  may  be  restored  to 

capital  account,  when,  790,  792. 
predecessor, 

invested  capital  of,  during  prewar  period,  762. 
[n-ewar  period,  751. 

income  for,  762. 

invested  capital  for,  781. 

predecessor,  invested  capital  and  income  of,  762. 
profits  earned  during  taxable  year, 

may  be  included  in  invested  capital  by  individuals,  794. 

but  not  by  corporations  or  partnerships,  788. 
rate  of  tax. 

class  A  income,  754. 

class  B  income,  755. 
reconstruction  of  surplus  and  undivided  profits  account,  790. 
reorganization  after  January  2,  1913. 

deduction  in  case  of,  how  determined,  762. 
representative  concerns, 

deductions  of  763. 
returns, 

consolidated,  may  be  required  of  affiliated  corporations, 
800. 

corporations,  752. 

individuals,  753. 

information  as  to  prewar  period  not  required,  when,  798. 

partnership,  753. 
rules  for  computing  invested  capital,  782,  794. 
salaries,  754. 

allowance  for,  in  case  of  individuals,  774. 
for  prewar  period,  775. 

domestic  partnership,  770. 
for  prewar  period,  771. 

foreign  partnerships,  770. 
for  prewar  period,  771. 

non-resident  alien,  774. 

for  prewar  period,  775. 
sale  of  assets,  782. 
Section  210, 

scope  of,   764,   781. 
stock  dividends   earnings   of   taxable   vear   distributed   bv, 

788. 
stock  insurance  companies,  792. 
stock  of  taxable  corporations, 


904  INDEX 

WAR  EXCESS  PROFITS  TAX— Cont. 

issued  for  mixed  aggregate  of  tangible  and  intangible 

property,  783,  787. 
issued  for  patents,  783. 
returned  to  corporation  as  gift,  783,  785. 
stock  without  par  value, 

issued  for  intangible  property  prior  to  March  3,  1917,  787. 
stocks  owned  by  taxable  corporation  excluded  from  invested, 
capital,  778. 

unless  income  is  derived  from  trading  therein,  778. 

or  dividends  therefrom  are  taxable,  77!). 
treated  as  tangible  property,  77!>. 
subsidiary  corporations,  799,  800. 
surplus  and  undivided  profits, 

allowance  for  losses,  etc.,  776. 
earned  during  taxable  year,  788. 
employed    in    business,    789. 
may  be  increased  above  book  value,  when,  790. 
tangible  property,   779. 

paid  for  in  stock  after  January  1,  1914,  786. 

rule  when  part  of  mixed  aggregate,  787. 

stock  issued  for,  783,  785,  789. 

valuation  of,  paid  into  trade  or  business  of  individuals, 

793. 
value  at   time   of  conveyance,  in  excess   of   cash  paid 
therefore  may  be  considered  as  paid  in  surplus,  789. 
value  at  time  of  conveyance  in  excess  of  par  value  of 
stock  issued  therefore,  may  be  considered  as  paid  in 
surplus,  789. 
value  at    time   of   conveyance  where   received   as   gifl 
may  be  considered  paid  in  surplus,  789. 
tax  for  period  less  than  one  year,  760. 
tax-free  securities  may  be  included  in  invested  capital, 
when,  778. 
-     taxable  year,  751. 

tools,  expenditures  for,  charged  to  expense,  may  be  restored 

to  capital  account,  when,  790,  792. 
trade  brands, 

amounts  expended  for,  791,  792. 
stock  issued  for,  783,  786. 
trade  defined,  751. 
trade  marks, 

amounts  expended  for,  791. 
stock  issued  for,  783,  786. 
trades  having  nominal  capital,  796,  797. 
trading  profits  from  stocks  and  tax-free  bonds,  778. 
treasury  stock,  783. 

proceeds  from  sale  of,  785. 
ultra-conservative  accounting,  782. 
undivided  profits, 

earned   during  taxable  year,  788. 


[NDEX  905 

WAR  EXCESS   PROFITS  TAX— Cont. 

"United  States,"   defined,   751. 

wages,  754,  771. 

war  industries,  depreciation  in,  782. 

WARRANTS, 

of  municipality  as  income,  689. 

\\  ITHHOLDING  AGENTS, 

nominally  owned  stock,  duties  as  to,  666. 

WITHHOLDING    AT  SOURCE,  743. 

non-resident  alien  nominal  holder  of  stork,  tax  on.  Ii6i. 
refund  of  tax  to  non-resident  alien,  662. 

WITHHOLDING  TAX,   743. 

n  ^-resident  aliens,  payments  by  residents  to,  661. 

WORTHLESS  DEBTS, 
deductions  for,  712. 


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